MMP - 2015.6.30.10Q


 
 
 
 
 

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, 2015
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 5, 2015, there were 227,427,247 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2015
 
2014
 
2015
Transportation and terminals revenue
$
353,568

 
$
374,016

 
$
671,205

 
$
719,616

Product sales revenue
137,657

 
109,969

 
433,720

 
283,096

Affiliate management fee revenue
5,221

 
3,558

 
10,127

 
6,921

Total revenue
496,446

 
487,543

 
1,115,052

 
1,009,633

Costs and expenses:
 
 
 
 
 
 
 
Operating
124,874

 
131,433

 
198,371

 
229,928

Cost of product sales
109,103

 
94,507

 
307,143

 
230,686

Depreciation and amortization
46,897

 
40,440

 
84,408

 
82,137

General and administrative
39,309

 
37,942

 
74,244

 
73,440

Total costs and expenses
320,183

 
304,322

 
664,166

 
616,191

Earnings of non-controlled entities
1,955

 
24,542

 
2,421

 
34,132

Operating profit
178,218

 
207,763

 
453,307

 
427,574

Interest expense
37,265

 
39,756

 
73,681

 
76,363

Interest income
(406
)
 
(334
)
 
(797
)
 
(683
)
Interest capitalized
(6,843
)
 
(2,946
)
 
(12,153
)
 
(5,053
)
Debt placement fee amortization expense
602

 
640

 
1,201

 
1,227

Other income
—

 
(6,539
)
 
—

 
(6,260
)
Income before provision for income taxes
147,600

 
177,186

 
391,375

 
361,980

Provision for income taxes
1,340

 
(205
)
 
2,561

 
953

Net income
$
146,260

 
$
177,391

 
$
388,814

 
$
361,027

Basic and diluted net income per limited partner unit
$
0.64

 
$
0.78

 
$
1.71

 
$
1.59

Weighted average number of limited partner units outstanding used for basic and diluted net income per unit calculation
227,288

 
227,631

 
227,215

 
227,578











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 June 30,
 
Six Months Ended June 30,
 
2014
 
2015
 
2014
 
2015
Net income
$
146,260

 
$
177,391

 
$
388,814

 
$
361,027

Other comprehensive income:
 
 

 
 
 

Derivative activity:
 
 
 
 
 
 
 
Net gain (loss) on cash flow hedges(1)
—

 
1,936

 
(3,613
)
 
(13,529
)
Reclassification of net loss (gain) on cash flow hedges to income(1)  
(153
)
 
388

 
(179
)
 
588

Changes in employee benefit plan assets and benefit obligations recognized in other comprehensive income:
 
 
 
 
 
 
 
Amortization of prior service credit(2)
(928
)
 
(928
)
 
(1,823
)
 
(1,856
)
Amortization of actuarial loss(2)
1,192

 
2,023

 
2,016

 
3,595

Settlement cost(2)
1,569

 
—

 
1,569

 
—

Total other comprehensive income (loss)
1,680

 
3,419

 
(2,030
)
 
(11,202
)
Comprehensive income
$
147,940

 
$
180,810

 
$
386,784

 
$
349,825

(1) See Note 8–Derivative Financial Instruments for details of the amount of gain/loss recognized in accumulated other comprehensive loss ("AOCL") for derivative financial instruments and the amount of gain/loss reclassified from AOCL into income.
(2) See Note 6–Employee Benefit Plans for details of the changes in employee benefit plan assets and benefit obligations recognized in AOCL.

























See notes to consolidated financial statements.

3
Table of Contents


MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
 
December 31,
2014
 
June 30,
2015
ASSETS
 
 
(Unaudited)
Current assets:
 
 
 
Cash and cash equivalents
$
17,063

 
$
29,030

Trade accounts receivable (less allowance for doubtful accounts of $0 and $20 at December 31, 2014 and June 30, 2015, respectively)
84,465

 
84,715

Other accounts receivable
15,711

 
12,447

Inventory
157,762

 
159,920

Energy commodity derivatives contracts, net
87,151

 
—

Energy commodity derivatives deposits
6,184

 
5,696

Other current assets
34,331

 
40,893

Total current assets
402,667

 
332,701

Property, plant and equipment
5,533,935

 
5,832,338

Less: Accumulated depreciation
1,204,601

 
1,278,865

Net property, plant and equipment
4,329,334

 
4,553,473

Investments in non-controlled entities
613,867

 
666,451

Long-term receivables
28,611

 
25,614

Goodwill
53,260

 
53,260

Other intangibles (less accumulated amortization of $11,526 and $12,885 at December 31, 2014 and June 30, 2015, respectively)
4,573

 
3,214

Debt placement costs (less accumulated amortization of $8,952 and $10,179 at December 31, 2014 and June 30, 2015, respectively)
18,084

 
21,591

Tank bottoms and linefill
42,585

 
47,204

Other noncurrent assets
24,304

 
28,548

Total assets
$
5,517,285

 
$
5,732,056

LIABILITIES AND PARTNERS' CAPITAL
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
97,131

 
$
95,810

Accrued payroll and benefits
48,298

 
33,576

Accrued interest payable
45,973

 
52,037

Accrued taxes other than income
47,888

 
46,865

Environmental liabilities
10,564

 
14,581

Deferred revenue
71,142

 
71,178

Accrued product purchases
44,355

 
21,629

Energy commodity derivatives contracts, net
5,413

 
2,860

Energy commodity derivatives deposits
84,463

 
—

Other current liabilities
80,928

 
44,669

Total current liabilities
536,155

 
383,205

Long-term debt
2,982,895

 
3,326,936

Long-term pension and benefits
75,155

 
79,807

Other noncurrent liabilities
29,069

 
23,843

Environmental liabilities
25,778

 
21,877

Commitments and contingencies

 

Partners’ capital:
 
 
 
Limited partner unitholders (227,068 units and 227,427 units outstanding at December 31, 2014 and June 30, 2015, respectively)
1,949,773

 
1,989,130

Accumulated other comprehensive loss
(81,540
)
 
(92,742
)
Total partners’ capital
1,868,233

 
1,896,388

Total liabilities and partners' capital
$
5,517,285

 
$
5,732,056


See notes to consolidated financial statements.

4
Table of Contents


MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Six Months Ended
 
June 30,
 
2014
 
2015
Operating Activities:
 
 
 
Net income
$
388,814

 
$
361,027

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
84,408

 
82,137

Debt placement fee amortization expense
1,201

 
1,227

Loss on sale and retirement of assets
3,310

 
2,084

Earnings of non-controlled entities
(2,421
)
 
(34,132
)
Distributions from investments in non-controlled entities
1,713

 
31,243

Equity-based incentive compensation expense
12,753

 
10,539

Amortization of prior service credit, actuarial loss and pension settlement
1,762

 
1,739

Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable and other accounts receivable
25,486

 
3,096

Inventory
(1,718
)
 
(2,158
)
Energy commodity derivatives contracts, net of derivatives deposits
(4,133
)
 
(1,411
)
Accounts payable
486

 
8,406

Accrued payroll and benefits
(11,434
)
 
(14,722
)
Accrued interest payable
1,038

 
6,064

Accrued taxes other than income
(3,679
)
 
(1,023
)
Accrued product purchases
(25,278
)
 
(22,726
)
Deferred revenue
6,174

 
36

Current and noncurrent environmental liabilities
(3,820
)
 
116

Other current and noncurrent assets and liabilities
2,694

 
(16,723
)
Net cash provided by operating activities
477,356

 
414,819

Investing Activities:
 
 
 
Additions to property, plant and equipment, net(1)
(153,250
)
 
(275,848
)
Proceeds from sale and disposition of assets
107

 
3,153

Acquisition of business
—

 
(54,678
)
Investments in non-controlled entities
(285,945
)
 
(36,443
)
Distributions in excess of earnings of non-controlled entities
1,765

 
—

Net cash used by investing activities
(437,323
)
 
(363,816
)
Financing Activities:
 
 
 
Distributions paid
(271,914
)
 
(321,239
)
Net commercial paper borrowings (repayments)
220,977

 
(151,960
)
Borrowings under long-term notes
257,713

 
499,589

Payments on notes
(250,000
)
 
—

Debt placement costs
(2,887
)
 
(4,734
)
Net payment on financial derivatives
(3,613
)
 
(42,908
)
Settlement of tax withholdings on long-term incentive compensation
(14,813
)
 
(17,784
)
Net cash used by financing activities
(64,537
)
 
(39,036
)
Change in cash and cash equivalents
(24,504
)
 
11,967

Cash and cash equivalents at beginning of period
25,235

 
17,063

Cash and cash equivalents at end of period
$
731

 
$
29,030

 
 
 
 
Supplemental non-cash investing and financing activities:
 
 
 
Contribution of property, plant and equipment to a non-controlled entity
$
—

 
$
13,252

Issuance of limited partner units in settlement of equity-based incentive plan awards
$
7,315

 
$
8,045

 
 
 
 
(1)  Additions to property, plant and equipment
$
(149,138
)
 
$
(268,849
)
Changes in accounts payable and other current liabilities related to capital expenditures
(4,112
)
 
(6,999
)
Additions to property, plant and equipment, net
$
(153,250
)
 
$
(275,848
)

See notes to consolidated financial statements.

5
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.

Description of Business

We are principally engaged in the transportation, storage and distribution of refined petroleum products and crude oil.  As of June 30, 2015, our asset portfolio, including the assets of our joint ventures, consisted of:

•
our refined products segment, comprised of our 9,500-mile refined products pipeline system with 52 terminals as well as 28 independent terminals not connected to our pipeline system and our 1,100-mile ammonia pipeline system;

•
our crude oil segment, comprised of approximately 1,600 miles of crude oil pipelines and storage facilities with an aggregate storage capacity of approximately 21 million barrels, of which 13 million barrels are used for leased storage; and

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

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

•
refined products 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 are produced as by-products of the crude oil refining process and in connection with natural gas production. LPGs include butane and propane;

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

•
heavy oils and feedstocks 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 are used as feedstocks by refineries and petrochemical facilities;

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

•
ammonia 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.
 

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



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, 2014 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, 2015, the results of operations for the three and six months ended June 30, 2014 and 2015 and cash flows for the six months ended June 30, 2014 and 2015. The results of operations for the six months ended June 30, 2015 are not necessarily indicative of the results to be expected for the full year ending December 31, 2015 as profits from our blending activities are realized largely during the first and fourth quarters of each year. Additionally, gasoline demand, which drives transportation volumes and revenues on our pipeline systems, generally trends higher during the summer driving months. Further, the volatility of commodity prices impact the profits from our commodity activities and, to a lesser extent, the volume of petroleum products we ship on our pipelines.

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, 2014.

Use of Estimates

The preparation of our consolidated financial statements in conformity with generally accepted accounting principles in the U.S. ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities that exist at the date of our consolidated financial statements, as well as their impact on the reported amounts of revenue and expense during the reporting periods. Actual results could differ from those estimates.


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. See Note 8 – Derivative Financial Instruments for a discussion of our commodity hedging strategies and how our NYMEX contracts impact product sales revenues. All of the petroleum products inventory we physically sell associated with our butane blending and fractionation activities as well as the barrels from product gains we obtain from our independent terminals are reported as product sales on our consolidated statements of income. The physical sale of the petroleum products inventory from product gains obtained from our pipeline operations and crude terminal activities are reported as adjustments to operating expense.

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



For the three and six months ended June 30, 2014 and 2015, product sales revenue included the following (in thousands): 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2015
 
2014
 
2015
Physical sale of petroleum products
$
154,310

 
$
133,319

 
$
447,550

 
$
302,566

NYMEX contract adjustments:
 
 
 
 
 
 
 
Change in value of NYMEX contracts that were not designated as hedging instruments associated with our butane blending and fractionation activities
(16,666
)
 
(23,350
)
 
(13,843
)
 
(19,470
)
Other
13

 
—

 
13

 
—

Total NYMEX contract adjustments
(16,653
)
 
(23,350
)
 
(13,830
)
 
(19,470
)
Total product sales revenue
$
137,657

 
$
109,969

 
$
433,720

 
$
283,096





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 revenue from affiliates and external customers, operating expenses, cost of product sales and earnings of non-controlled 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 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 consider when evaluating the core profitability of our separate operating segments.

On May 1, 2015, we acquired a refined products terminal in Atlanta, Georgia for net cash consideration of $54.7 million. As this acquired business is not significant to our consolidated operating results and financial position, pro forma financial information and the purchase price allocation of acquired assets and liabilities have not been presented. The results of the acquired operations subsequent to the acquisition date have been included in the accompanying consolidated financial statements and in the tables below in our refined products operating segment.



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



 
Three Months Ended June 30, 2014
 
(in thousands)
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenue
$
232,489

 
$
79,556

 
$
41,523

 
$
—

 
$
353,568

Product sales revenue
136,334

 
—

 
1,323

 
—

 
137,657

Affiliate management fee revenue
—

 
4,902

 
319

 
—

 
5,221

Total revenue
368,823

 
84,458

 
43,165

 
—

 
496,446

Operating expenses
97,302

 
11,867

 
16,544

 
(839
)
 
124,874

Cost of product sales
108,817

 
—

 
286

 
—

 
109,103

Earnings of non-controlled entities
—

 
(888
)
 
(1,067
)
 
—

 
(1,955
)
Operating margin
162,704

 
73,479

 
27,402

 
839

 
264,424

Depreciation and amortization expense
32,083

 
6,725

 
7,250

 
839

 
46,897

G&A expenses
25,374

 
7,697

 
6,238

 
—

 
39,309

Operating profit
$
105,247

 
$
59,057

 
$
13,914

 
$
—

 
$
178,218

 
 
Three Months Ended June 30, 2015
 
(in thousands)
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenue
$
233,711

 
$
95,756

 
$
44,549

 
$
—

 
$
374,016

Product sales revenue
109,323

 
—

 
646

 
—

 
109,969

Affiliate management fee revenue
—

 
3,211

 
347

 
—

 
3,558

Total revenue
343,034

 
98,967

 
45,542

 
—

 
487,543

Operating expenses
100,475

 
16,014

 
15,881

 
(937
)
 
131,433

Cost of product sales
94,326

 
—

 
181

 
—

 
94,507

Losses (earnings) of non-controlled entities
43

 
(23,905
)
 
(680
)
 
—

 
(24,542
)
Operating margin
148,190

 
106,858

 
30,160

 
937

 
286,145

Depreciation and amortization expense
23,962

 
8,264

 
7,277

 
937

 
40,440

G&A expenses
23,893

 
9,031

 
5,018

 
—

 
37,942

Operating profit
$
100,335

 
$
89,563

 
$
17,865

 
$
—

 
$
207,763




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



 
Six Months Ended June 30, 2014
 
(in thousands)
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenue
$
442,725

 
$
147,459

 
$
81,021

 
$
—

 
$
671,205

Product sales revenue
430,044

 
—

 
3,676

 
—

 
433,720

Affiliate management fee revenue
—

 
9,497

 
630

 
—

 
10,127

Total revenue
872,769

 
156,956

 
85,327

 
—

 
1,115,052

Operating expenses
148,459

 
20,925

 
30,630

 
(1,643
)
 
198,371

Cost of product sales
306,573

 
—

 
570

 
—

 
307,143

Earnings of non-controlled entities
—

 
(708
)
 
(1,713
)
 
—

 
(2,421
)
Operating margin
417,737

 
136,739

 
55,840

 
1,643

 
611,959

Depreciation and amortization expense
55,255

 
13,188

 
14,322

 
1,643

 
84,408

G&A expenses
48,393

 
13,691

 
12,160

 
—

 
74,244

Operating profit
$
314,089

 
$
109,860

 
$
29,358

 
$
—

 
$
453,307

 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
(in thousands)
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenue
$
450,488

 
$
182,316

 
$
86,812

 
$
—

 
$
719,616

Product sales revenue
281,962

 
—

 
1,134

 
—

 
283,096

Affiliate management fee revenue
—

 
6,238

 
683

 
—

 
6,921

Total revenue
732,450

 
188,554

 
88,629

 
—

 
1,009,633

Operating expenses
170,781

 
29,875

 
31,216

 
(1,944
)
 
229,928

Cost of product sales
229,960

 
—

 
726

 
—

 
230,686

Losses (earnings) of non-controlled entities
98

 
(32,829
)
 
(1,401
)
 
—

 
(34,132
)
Operating margin
331,611

 
191,508

 
58,088

 
1,944

 
583,151

Depreciation and amortization expense
47,409

 
16,493

 
16,291

 
1,944

 
82,137

G&A expenses
46,492

 
17,117

 
9,831

 
—

 
73,440

Operating profit
$
237,710

 
$
157,898

 
$
31,966

 
$
—

 
$
427,574

 
 
 
 
 
 
 
 
 
 

4.
Investments in Non-Controlled Entities

Recently-Formed Company

Seabrook Logistics, LLC ("Seabrook") was formed in second quarter 2015 to construct, own and operate crude oil storage and pipeline infrastructure in the Houston Gulf Coast area. We hold a 50% equity ownership interest in Seabrook, with LBC Tank Terminals, LLC holding the other 50% equity ownership interest. The assets to be constructed and owned by Seabrook include over 700,000 barrels of crude oil storage located adjacent to LBC's existing terminal in Seabrook, Texas. In addition, Seabrook will construct and own an 18-inch diameter pipeline, which will connect Seabrook's storage facilities to an existing third-party pipeline that will transport crude oil to a Houston-area refinery. Subject to the receipt of permits and regulatory approvals, the new storage facility and pipeline infrastructure are expected to be operational in the first quarter of 2017.

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




Our investments in non-controlled entities at June 30, 2015 were comprised of:
Entity
 
Ownership Interest
BridgeTex Pipeline Company, LLC ("BridgeTex")
 
50%
Double Eagle Pipeline LLC ("Double Eagle")
 
50%
Osage Pipe Line Company, LLC ("Osage")
 
50%
Powder Springs Logistics, LLC ("Powder Springs")
 
50%
Saddlehorn Pipeline Company, LLC ("Saddlehorn")
 
40%
Seabrook Logistics, LLC
 
50%
Texas Frontera, LLC ("Texas Frontera")
 
50%

The management fees we have recognized or will recognize from BridgeTex, Osage, Powder Springs, Saddlehorn, Seabrook and Texas Frontera are or will be reported as affiliate management fee revenue on our consolidated statements of income. 

At December 31, 2014 and June 30, 2015, we recognized liabilities of $2.2 million and $1.1 million, respectively, to BridgeTex primarily for pre-paid construction management fees. For the three and six months ended June 30, 2015, we recognized pipeline capacity lease revenue from BridgeTex of $8.5 million and $16.9 million, respectively, which we included in transportation and terminals revenue on our consolidated statements of income. We recognized a $2.6 million receivable from BridgeTex at December 31, 2014 (no receivable was recognized at June 30, 2015).

We recognized throughput revenue from Double Eagle for the three months ended June 30, 2014 and 2015 of $0.8 million and $0.9 million, respectively, and for the six months ended June 30, 2014 and 2015 of $1.3 million and $1.8 million, respectively, which we included in transportation and terminals revenue.  At December 31, 2014 and June 30, 2015, respectively, we recognized a $0.3 million trade accounts receivable from Double Eagle.

The financial results from Texas Frontera are included in our marine storage segment, the financial results from BridgeTex, Double Eagle, Osage, Saddlehorn and Seabrook are or will be included in our crude oil segment and the financial results from Powder Springs are included in our refined products segment as earnings/losses of non-controlled entities.


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



A summary of our investments in non-controlled entities follows (in thousands):
 
 
BridgeTex
 
All Others
 
Consolidated
Investments at December 31, 2014
 
$
489,348

 
$
124,519

 
$
613,867

Additional investment
 
16,609

 
33,086

 
49,695

Earnings of non-controlled entities:
 
 
 

 
 
Proportionate share of earnings
 
31,828

 
3,699

 
35,527

Amortization of excess investment and capitalized interest
 
(1,020
)
 
(375
)
 
(1,395
)
Earnings of non-controlled entities
 
30,808

 
3,324

 
34,132

Less:
 
 
 
 
 
 
Distributions of earnings from investments in non-controlled entities
 
30,332

 
911

 
31,243

Investments at June 30, 2015
 
$
506,433

 
$
160,018

 
$
666,451

 
 
 
 
 
 
 

Summarized financial information of our non-controlled entities for the three and six months ended June 30, 2014 and 2015 follows (in thousands):
 
 
Three Months Ended June 30, 2014
 
Three Months Ended June 30, 2015
 
 
BridgeTex
 
All Others
 
Consolidated
 
BridgeTex
 
All Others
 
Consolidated
Revenue
 
$
—

 
$
11,709

 
$
11,709

 
$
61,629

 
$
11,627

 
$
73,256

Net income (loss)
 
$
(240
)
 
$
4,524

 
$
4,284

 
$
45,619

 
$
4,793

 
$
50,412


 
 
Six Months Ended June 30, 2014
 
Six Months Ended June 30, 2015
 
 
BridgeTex
 
All Others
 
Consolidated
 
BridgeTex
 
All Others
 
Consolidated
Revenue
 
$
—

 
$
18,464

 
$
18,464

 
$
98,765

 
$
21,147

 
$
119,912

Net income (loss)
 
$
(280
)
 
$
5,871

 
$
5,591

 
$
63,656

 
$
7,374

 
$
71,030




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



5.
Inventory

Inventory at December 31, 2014 and June 30, 2015 was as follows (in thousands):
 
 
December 31, 2014
 
June 30,
2015
Refined products
$
67,055

 
$
33,862

Liquefied petroleum gases
37,642

 
39,942

Transmix
36,867

 
47,513

Crude oil
10,015

 
32,501

Additives
6,183

 
6,102

Total inventory
$
157,762

 
$
159,920



6.
Employee Benefit Plans
We sponsor two pension plans for certain union employees and a pension plan primarily for non-union 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, 2014 and 2015 (in thousands):
 
 
Three Months Ended
 
Three Months Ended
 
June 30, 2014
 
June 30, 2015
 
Pension
Benefits
 
Other  Postretirement
Benefits
 
Pension
Benefits
 
Other  Postretirement
Benefits
Components of net periodic benefit costs:
 
 
 
 
 
 
 
Service cost
$
3,352

 
$
47

 
$
4,975

 
$
56

Interest cost
2,030

 
139

 
2,008

 
109

Expected return on plan assets
(1,490
)
 
—

 
(2,123
)
 
—

Amortization of prior service credit
—

 
(928
)
 
—

 
(928
)
Amortization of actuarial loss
930

 
262

 
1,806

 
217

Settlement cost
1,569

 
—

 
—

 
—

Net periodic benefit cost (credit)
$
6,391

 
$
(480
)
 
$
6,666

 
$
(546
)
 

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



 
 
Six Months Ended
 
Six Months Ended
 
June 30, 2014
 
June 30, 2015
 
Pension
Benefits
 
Other  Postretirement
Benefits
 
Pension
Benefits
 
Other  Postretirement
Benefits
Components of net periodic benefit costs:
 
 
 
 
 
 
 
Service cost
$
6,704

 
$
114

 
$
9,445

 
$
122

Interest cost
3,689

 
253

 
3,877

 
219

Expected return on plan assets
(3,187
)
 
—

 
(4,019
)
 
—

Amortization of prior service cost (credit)
33

 
(1,856
)
 
—

 
(1,856
)
Amortization of actuarial loss
1,559

 
457

 
3,153

 
442

Settlement cost
1,569

 
—

 
—

 
—

Net periodic benefit cost (credit)
$
10,367

 
$
(1,032
)
 
$
12,456

 
$
(1,073
)
 
 
 
 
 
 
 
 

Contributions estimated to be paid into the plans in 2015 are $21.1 million and $1.1 million for the pension and other postretirement benefit plans, respectively.

We match our employees' qualifying contributions to our defined contribution plan, resulting in expense to us. Expenses related to the defined contribution plan were $2.0 million and $2.2 million, respectively, for the three months ended June 30, 2014 and 2015, and $4.6 million and $5.0 million, respectively, for the six months ended June 30, 2014 and 2015.

Amounts Included in AOCL

The changes in AOCL related to employee benefit plan assets and benefit obligations for the three and six months ended June 30, 2014 and 2015 were as follows (in thousands):
 
 
Three Months Ended
 
Three Months Ended
 
 
June 30, 2014
 
June 30, 2015
Gains (Losses) Included in AOCL
 
Pension Benefits
 
Other Postretirement Benefits
 
Pension Benefits
 
Other Postretirement Benefits
Beginning balance
 
$
(35,522
)
 
$
2,320

 
$
(61,910
)
 
$
(2,399
)
Amortization of prior service credit
 
—

 
(928
)
 
—

 
(928
)
Amortization of actuarial loss
 
930

 
262

 
1,806

 
217

Settlement cost
 
1,569

 
—

 
—

 
—

Ending balance
 
$
(33,023
)
 
$
1,654

 
$
(60,104
)
 
$
(3,110
)
 
 
Six Months Ended
 
Six Months Ended
 
 
June 30, 2014
 
June 30, 2015
Gains (Losses) Included in AOCL
 
Pension Benefits
 
Other Postretirement Benefits
 
Pension Benefits
 
Other Postretirement Benefits
Beginning balance
 
$
(36,184
)
 
$
3,053

 
$
(63,257
)
 
$
(1,696
)
Amortization of prior service cost (credit)
 
33

 
(1,856
)
 
—

 
(1,856
)
Amortization of actuarial loss
 
1,559

 
457

 
3,153

 
442

Settlement cost
 
1,569

 
—

 
—

 
—

Ending balance
 
$
(33,023
)
 
$
1,654

 
$
(60,104
)
 
$
(3,110
)

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



7.
Debt
Consolidated debt at December 31, 2014 and June 30, 2015 was as follows (in thousands, except as otherwise noted):
 
 
December 31, 2014
 
June 30,
2015
 
Weighted-Average
Interest Rate for the Six Months Ended June 30, 2015 (1)
Commercial paper(2)
 
$
296,942

 
$
144,982

 
0.5%
$250.0 million of 5.65% Notes due 2016
 
250,758

 
250,546

 
5.7%
$250.0 million of 6.40% Notes due 2018
 
257,280

 
256,248

 
5.4%
$550.0 million of 6.55% Notes due 2019
 
567,868

 
566,006

 
5.7%
$550.0 million of 4.25% Notes due 2021
 
556,304

 
555,837

 
4.0%
$250.0 million of 3.20% Notes due 2025(2)
 
—

 
249,687

 
3.2%
$250.0 million of 6.40% Notes due 2037
 
249,017

 
249,026

 
6.4%
$250.0 million of 4.20% Notes due 2042
 
248,406

 
248,421

 
4.2%
$550.0 million of 5.15% Notes due 2043
 
556,320

 
556,270

 
5.1%
$250.0 million of 4.20% Notes due 2045(2)
 
—

 
249,913

 
4.6%
Total debt
 
$
2,982,895

 
$
3,326,936

 
4.8%
 
 
 
 
 
 
 

(1)
Weighted-average interest rate includes the amortization/accretion of discounts, premiums and gains/losses realized on historical cash flow and fair value hedges recognized as interest expense.

(2)
These borrowings were outstanding for only a portion of the six month period ending June 30, 2015. The weighted-average interest rate for these borrowings was calculated based on the number of days the borrowings were outstanding during the noted period.

All of the instruments detailed in the table above are senior indebtedness.

The face value of our debt at December 31, 2014 and June 30, 2015 was $2.9 billion and $3.3 billion, respectively. The difference between the face value and carrying value of our 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.

2015 Debt Offerings

In March 2015, we issued $250.0 million of our 3.20% notes due 2025 in an underwritten public offering. The notes were issued at 99.871% of par. Net proceeds from this offering were $247.6 million, after underwriting discounts and offering expenses of $2.1 million.

Also in March 2015, we issued $250.0 million of our 4.20% notes due 2045 in an underwritten public offering. The notes were issued at 99.965% of par. Net proceeds from this offering were $247.3 million, after underwriting discounts and offering expenses of $2.6 million.

The net proceeds from these offerings were used to repay borrowings outstanding under our commercial paper program and for general partnership purposes, including expansion capital.

Other Debt

Revolving Credit Facility. The total borrowing capacity under our revolving credit facility, which matures in November 2018, is $1.0 billion. Borrowings outstanding under the facility are classified as long-term debt on our consolidated balance sheets. Borrowings under the facility are unsecured and bear interest at LIBOR plus a spread

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



ranging from 1.0% to 1.75% based on our credit ratings. Additionally, an unused commitment fee is assessed at a rate from 0.10% to 0.28%, depending on our credit ratings. The unused commitment fee was 0.125% at June 30, 2015. Borrowings under this facility may be used for general partnership purposes, including capital expenditures. As of June 30, 2015, 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.

Commercial Paper Program. The maturities of our commercial paper notes vary, but may not exceed 397 days from the date of issuance. The commercial paper notes are sold under customary terms in the commercial paper market and are issued at a discount from par, or alternatively, are sold at par and bear varying interest rates on a fixed or floating basis. The commercial paper we can issue is limited by the amounts available under our revolving credit facility up to an aggregate principal amount of $1.0 billion and, therefore, is classified as long-term debt.


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. Adjustments resulting from discontinued hedges continue to be recognized in accordance with their historic hedging relationships.

In first quarter 2015, we entered into a $50.0 million forward-starting interest rate swap agreement to hedge against the risk of variability of future interest payments on a portion of debt we anticipate issuing in 2016. The fair value of this contract at June 30, 2015 was recorded on our balance sheet as an other noncurrent asset of $2.9 million with an offset to other comprehensive income. We account for this agreement as a cash flow hedge.

In third and fourth quarter of 2014, we entered into $250.0 million of forward-starting interest rate swap agreements to hedge against the risk of variability of future interest payments on a portion of debt we anticipated issuing in 2015. We accounted for these agreements as cash flow hedges. When we issued the $250.0 million of 4.20% notes due 2045 in first quarter 2015, we settled the associated interest rate swap agreements for a loss of $42.9 million. The loss was recorded to other comprehensive income ($26.5 million and $16.4 million recorded in 2014 and 2015, respectively) and will be recognized into earnings as an adjustment to our periodic interest expense accruals over the life of the associated notes. This loss was also reported as a net payment on financial derivatives in the financing activities of our consolidated statements of cash flows in 2015.

Commodity Derivatives

Hedging Strategies

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 NYMEX and forward purchase and sale contracts to help manage commodity price changes, which is intended to mitigate the risk of decline in the product margin realized from our butane blending activities that we choose to hedge. Further, certain of our other commercial operations generate petroleum products. We use NYMEX contracts to hedge against future price changes for some of these commodities.

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

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



purchases and sales are accounted for using traditional accrual accounting. As of June 30, 2015, we had commitments under these forward purchase and sale contracts as follows (in millions):
 
Notional Value
 
Barrels
Forward purchase contracts
$
118.3


3.5
Forward sale contracts
$
11.4


0.1

The NYMEX contracts that we enter into 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 is 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 is recorded as adjustments to the asset or liability being hedged. Any ineffectiveness and amounts excluded from the assessment of hedge effectiveness 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 under Accounting Standards Codification ("ASC") 815, Derivatives and Hedging.
 
Changes in the fair value of these agreements are recognized currently in earnings.

During the three and six months ended June 30, 2014 and 2015, none of the commodity hedging contracts we entered into qualified for or were designated as cash flow hedges.

Period changes in the fair value of NYMEX agreements that are accounted for as economic hedges (other than those economic hedges of our butane purchases and our pipeline product overages as discussed below), the effective portion of changes in the fair value of cash flow hedges that are reclassified from accumulated other comprehensive income/loss and any ineffectiveness associated with hedges related to our commodity activities are recognized currently in earnings as adjustments to product sales.

We also use NYMEX contracts, 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. Period changes in the fair value of these agreements are recognized currently in earnings as adjustments to cost of product sales.

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

Additionally, we hold crude oil barrels that we use for operational purposes which we classify as long-term assets on our balance sheet and which are reported as tank bottom and linefill assets. We use NYMEX contracts to hedge against changes in the price of these crude oil barrels. We record the effective portion of the gains or losses for those contracts that qualify as fair value hedges as adjustments to the assets being hedged and the ineffective portions as well as amounts excluded from the assessment of hedge effectiveness as adjustments to other income or expense.

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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 at June 30, 2015 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 December 2015 and November 2016
NYMEX - Economic Hedges
 
5.6 million barrels of refined products and crude oil(1)
 
Between July 2015 and December 2016
NYMEX - Economic Hedges
 
1.3 million barrels of future purchases of butane
 
Between September 2015 and December 2016

(1) Of the 5.6 million barrels of products we have economically hedged at June 30, 2015, we had open agreements which swap the pricing on 1.6 million of those barrels from New York Harbor to Platts Group 3 or Platts Gulf Coast, which are the geographic locations where these barrels will be sold.

Energy Commodity Derivatives Contracts and Deposits Offsets

At June 30, 2015, we had made margin deposits of $5.7 million for our NYMEX contracts with one of our counterparties, 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 against our margin deposits under a master netting arrangement for each counterparty; however, we have elected to present the combined fair values of our open NYMEX contracts 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 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, 2014 and June 30, 2015 (in thousands):
 
 
December 31, 2014
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(1)
 
Margin Deposit Amounts Not Offset in the Consolidated Balance Sheet
 
Net Asset Amount(3)
Energy commodity derivatives
 
$
106,764

 
$
(10,622
)
 
$
96,142

 
$
(78,279
)
 
$
17,863

 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
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(2)
 
Margin Deposit Amounts Not Offset in the Consolidated Balance Sheet
 
Net Asset Amount(3)
Energy commodity derivatives
 
$
26,262

 
$
(12,636
)
 
$
13,626

 
$
5,696

 
$
19,322

 
 
 
 
 
 
 
 
 
 
 
(1)
Net amount includes energy commodity derivative contracts classified as current assets, net, of $87,151, current liabilities of $5,413 and noncurrent assets of $14,404.
(2)
Net amount includes energy commodity derivative contracts classified as current liabilities, net, of $2,860 and noncurrent assets of $16,486.
(3)
This represents the maximum amount of loss we would incur if all of our counterparties failed to perform on their derivative contracts.


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



Impact of Derivatives on Our Financial Statements

Comprehensive Income

The changes in derivative activity included in AOCL for the three and six months ended June 30, 2014 and 2015 were as follows (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Derivative Gains (Losses) Included in AOCL
2014
 
2015
 
2014
 
2015
Beginning balance
$
9,988

 
$
(31,852
)
 
$
13,627

 
$
(16,587
)
Net gain (loss) on interest rate contract cash flow hedges
—

 
1,936

 
(3,613
)
 
(13,529
)
Reclassification of net loss (gain) on cash flow hedges to income
(153
)
 
388

 
(179
)
 
588

Ending balance
$
9,835

 
$
(29,528
)
 
$
9,835

 
$
(29,528
)
The following tables provide a summary of the effect on our consolidated statements of income for the three and six months ended June 30, 2014 and 2015 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 June 30, 2014
 
 
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
Derivative Instrument
 
 
 
Effective Portion
 
Ineffective Portion
Interest rate contracts
 
 
$
—

 
 
Interest expense
 
 
$
(30
)
 
 
 
$
183

 
 
 
Three Months Ended June 30, 2015
 
 
Amount of Gain Recognized in AOCL on Derivative
 
Location of Loss Reclassified from AOCL into  Income
 
Amount of Loss Reclassified from AOCL into Income
Derivative Instrument
 
 
 
Effective Portion
 
Ineffective Portion
Interest rate contracts
 
 
$
1,936

 
 
Interest expense
 
 
$
(388
)
 
 
 
$
—

 
 
 
Six Months Ended June 30, 2014
 
 
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
Derivative Instrument
 
 
 
Effective Portion
 
Ineffective Portion
Interest rate contracts
 
 
$
(3,613
)
 
 
Interest expense
 
 
$
(4
)
 
 
 
$
183

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2015
 
 
Amount of Loss Recognized in AOCL on Derivative
 
Location of Loss Reclassified from AOCL into  Income
 
Amount of Loss Reclassified from AOCL into Income
Derivative Instrument
 
 
 
Effective Portion
 
Ineffective Portion
Interest rate contracts
 
 
$
(13,529
)
 
 
Interest expense
 
 
$
(588
)
 
 
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

As of June 30, 2015, the net loss estimated to be classified to interest expense over the next twelve months from AOCL is approximately $1.5 million.

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



Income Statement
The following table provides a summary of the effect on our consolidated statements of income for the three and six months ended June 30, 2014 and 2015 of derivatives accounted for under ASC 815, Derivatives and Hedging, that were not designated as hedging instruments (in thousands):
 
 
 
 
Amount of Gain (Loss) Recognized on Derivative
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
Location of Gain (Loss)
Recognized on Derivative
 
June 30,
 
June 30,
Derivative Instrument
 
 
2014
 
2015
 
2014
 
2015
NYMEX commodity contracts
 
Product sales revenue
 
$
(16,653
)
 
$
(23,350
)
 
$
(13,830
)
 
$
(19,470
)
NYMEX commodity contracts
 
Operating expenses
 
(4,268
)
 
(8,883
)
 
(3,903
)
 
(7,580
)
NYMEX commodity contracts
 
Cost of product sales
 
632

 
(856
)
 
776

 
(2,080
)
 
 
Total
 
$
(20,289
)
 
$
(33,089
)
 
$
(16,957
)
 
$
(29,130
)
The impact of the derivatives in the above table was reflected as cash from operations on our consolidated statements of cash flows.

During 2014 and 2015, 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 cumulative gains at December 31, 2014 and June 30, 2015 of $13.3 million and $8.7 million, respectively, from the agreements were offset by a cumulative decrease to tank bottoms and linefill. The differential between the current spot price and forward price is excluded from the assessment of hedge effectiveness for these fair value hedges. For the three and six months ended June 30, 2015, we recognized a gain of $6.5 million and $6.3 million, respectively, for the amounts we excluded from the assessment of effectiveness of these fair value hedges, which we reported as other income on our consolidated statements of income.
Balance Sheet
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, 2014 and June 30, 2015 (in thousands):
 
 
December 31, 2014
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
NYMEX commodity contracts
 
Energy commodity derivatives contracts, net
 
$
360

 
Energy commodity derivatives contracts, net
 
$
—

NYMEX commodity contracts
 
Other noncurrent assets
 
14,404

 
Other noncurrent liabilities
 
—

Interest rate contracts
 
Other current assets
 
—

 
Other current liabilities
 
26,478

 
 
Total
 
$
14,764

 
Total
 
$
26,478

 

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



 
 
June 30, 2015
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
NYMEX commodity contracts
 
Energy commodity derivatives contracts, net
 
$
316

 
Energy commodity derivatives contracts, net
 
$
—

NYMEX commodity contracts
 
Other noncurrent assets
 
16,089

 
Other noncurrent liabilities
 
—

Interest rate contracts
 
Other noncurrent assets
 
2,901

 
Other noncurrent liabilities
 
—

 
 
Total
 
$
19,306

 
Total
 
$
—

 

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, 2014 and June 30, 2015 (in thousands):
 
 
December 31, 2014
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
NYMEX commodity contracts
 
Energy commodity derivatives contracts, net
 
$
92,000

 
Energy commodity derivatives contracts, net
 
$
10,622

 
 
 
 
 
 
 
 
 
 
 
June 30, 2015
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
NYMEX commodity contracts
 
Energy commodity derivatives contracts, net
 
$
9,460

 
Energy commodity derivatives contracts, net
 
$
12,636

NYMEX commodity contracts
 
Other noncurrent assets
 
397

 
Other noncurrent liabilities
 
—

 
 
Total
 
$
9,857

 
Total
 
$
12,636

 

9.
Commitments and Contingencies

Environmental Liabilities

Liabilities recognized for estimated environmental costs were $36.3 million and $36.5 million at December 31, 2014 and June 30, 2015, 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 expenditures recognized as a result of changes in our environmental liabilities are generally included in operating expenses on our consolidated statements of income. Environmental expenses for the three and six months ended June 30, 2014 were $0.1 million and $0.4 million, respectively. Environmental expenses for the three and six months ended June 30, 2015 were $2.9 million and $4.3 million, respectively.


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



Environmental Receivables

Receivables from insurance carriers and other third parties related to environmental matters at December 31, 2014 were $5.1 million, of which $1.3 million and $3.8 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, 2015 were $4.9 million, of which $1.0 million and $3.9 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.

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 payout of 9.4 million of our limited partner units. The estimated units available under the LTIP at June 30, 2015 total 1.0 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, 2014
 
June 30, 2014
 
Equity
Method
 
Liability
Method
 
Total
 
Equity
Method
 
Liability
Method
 
Total
Performance/market-based awards:
 
 
 
 
 
 
 
 
 
 
 
2012 awards
$
1,022

 
$
1,617

 
$
2,639

 
$
2,044

 
$
2,541

 
$
4,585

2013 awards
2,195

 
1,305

 
3,500

 
3,376

 
1,853

 
5,229

2014 awards
1,228

 
—

 
1,228

 
2,132

 
—

 
2,132

Retention awards
298

 
—

 
298

 
807

 
—

 
807

Total
$
4,743

 
$
2,922

 
$
7,665

 
$
8,359

 
$
4,394

 
$
12,753

 
 
 
 
 
 
 
 
 
 
 
 
Allocation of LTIP expense on our consolidated statements of income:
G&A expense
 
 
 
 
$
7,486

 
 
 
 
 
$
12,460

Operating expense
 
 
 
 
179

 
 
 
 
 
293

Total
 
 
 
 
$
7,665

 
 
 
 
 
$
12,753


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



 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2015
 
Equity
Method
 
Liability
Method
 
Total
 
Equity
Method
 
Liability
Method
 
Total
Performance/market-based awards:
 
 
 
 
 
 
 
 
 
 
 
2013 awards
$
3,054

 
$
876

 
$
3,930

 
$
4,573

 
$
1,091

 
$
5,664

2014 awards
860