Document


 
 
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ________________________________________
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
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 November 1, 2016, there were 227,783,916 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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2016
 
2015
 
2016
Transportation and terminals revenue
$
410,387

 
$
413,433

 
$
1,149,100

 
$
1,175,748

Product sales revenue
172,731

 
133,356

 
455,827

 
403,607

Affiliate management fee revenue
3,557

 
4,993

 
10,478

 
11,140

Total revenue
586,675

 
551,782

 
1,615,405

 
1,590,495

Costs and expenses:
 
 
 
 
 
 
 
Operating
147,349

 
135,286

 
396,374

 
392,681

Cost of product sales
85,522

 
118,242

 
316,208

 
327,530

Depreciation and amortization
42,043

 
47,081

 
124,180

 
134,137

General and administrative
37,612

 
35,800

 
111,052

 
111,216

Total costs and expenses
312,526

 
336,409

 
947,814

 
965,564

Earnings of non-controlled entities
15,521

 
18,576

 
49,653

 
51,543

Operating profit
289,670

 
233,949

 
717,244

 
676,474

Interest expense
40,419

 
50,163

 
118,009

 
142,573

Interest income
(310
)
 
(302
)
 
(993
)
 
(1,067
)
Interest capitalized
(3,984
)
 
(7,877
)
 
(9,037
)
 
(21,143
)
Gain on exchange of interest in non-controlled entity
—

 
—

 
—

 
(28,144
)
Other expense (income)
1,706

 
(3,324
)
 
(4,554
)
 
(7,519
)
Income before provision for income taxes
251,839

 
195,289

 
613,819

 
591,774

Provision for income taxes
867

 
738

 
1,820

 
2,294

Net income
$
250,972

 
$
194,551

 
$
611,999

 
$
589,480

Basic net income per limited partner unit
$
1.10

 
$
0.85

 
$
2.69

 
$
2.59

Diluted net income per limited partner unit
$
1.10

 
$
0.85

 
$
2.69

 
$
2.59

Weighted average number of limited partner units outstanding used for basic net income per unit calculation(1)
227,580

 
227,960

 
227,540

 
227,913

Weighted average number of limited partner units outstanding used for diluted net income per unit calculation(1)
227,945

 
227,999

 
227,702

 
227,947


(1) See Note 10–Long-Term Incentive Plan for additional information regarding our weighted average unit calculations.




See notes to consolidated financial statements.

2
Table of Contents


MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2016
 
2015
 
2016
Net income
$
250,972

 
$
194,551

 
$
611,999

 
$
589,480

Other comprehensive income:
 
 

 
 
 

Derivative activity:
 
 
 
 
 
 
 
Net loss on cash flow hedges(1)
(3,410
)
 
(3,169
)
 
(16,939
)
 
(24,278
)
Reclassification of net loss on cash flow hedges to income(1)  
388

 
512

 
976

 
1,288

Changes in employee benefit plan assets and benefit obligations recognized in other comprehensive income:
 
 
 
 
 
 
 
Amortization of prior service credit(2)
(928
)
 
(973
)
 
(2,784
)
 
(2,920
)
Amortization of actuarial loss(2)
1,798

 
1,452

 
5,393

 
4,145

Settlement cost(2)
—

 
202

 
—

 
202

Total other comprehensive loss
(2,152
)
 
(1,976
)
 
(13,354
)
 
(21,563
)
Comprehensive income
$
248,820

 
$
192,575

 
$
598,645

 
$
567,917

(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
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MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
 
December 31,
2015
 
September 30,
2016
ASSETS
 
 
(Unaudited)
Current assets:
 
 
 
Cash and cash equivalents
$
28,731

 
$
291,097

Trade accounts receivable
83,893

 
126,141

Other accounts receivable
12,701

 
24,867

Inventory
130,868

 
123,011

Energy commodity derivatives contracts, net
39,243

 
—

Energy commodity derivatives deposits
—

 
30,559

Other current assets
43,418

 
52,600

Total current assets
338,854

 
648,275

Property, plant and equipment
6,166,766

 
6,657,305

Less: Accumulated depreciation
1,347,537

 
1,471,263

Net property, plant and equipment
4,819,229

 
5,186,042

Investments in non-controlled entities
765,628

 
912,419

Long-term receivables
20,374

 
22,101

Goodwill
53,260

 
53,260

Other intangibles (less accumulated amortization of $13,709 and $2,010 at December 31, 2015 and September 30, 2016, respectively)
1,856

 
52,102

Tank bottoms
27,533

 
35,429

Other noncurrent assets
14,833

 
10,157

Total assets
$
6,041,567

 
$
6,919,785

 
 
 
 
LIABILITIES AND PARTNERS’ CAPITAL
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
104,094

 
$
101,012

Accrued payroll and benefits
51,764

 
39,039

Accrued interest payable
51,296

 
48,903

Accrued taxes other than income
51,587

 
53,702

Environmental liabilities
15,679

 
11,711

Deferred revenue
81,627

 
98,818

Accrued product purchases
31,339

 
25,156

Energy commodity derivatives contracts, net
—

 
12,430

Energy commodity derivatives deposits
24,252

 
—

Current portion of long-term debt, net
250,335

 
250,020

Other current liabilities
51,099

 
43,058

Total current liabilities
713,072

 
683,849

Long-term debt, net
3,189,287

 
4,073,502

Long-term pension and benefits
77,551

 
70,416

Other noncurrent liabilities
24,162

 
29,408

Environmental liabilities
15,759

 
14,078

Commitments and contingencies

 

Partners’ capital:
 
 
 
Limited partner unitholders (227,427 units and 227,784 units outstanding at December 31, 2015 and September 30, 2016, respectively)
2,118,086

 
2,166,445

Accumulated other comprehensive loss
(96,350
)
 
(117,913
)
Total partners’ capital
2,021,736

 
2,048,532

Total liabilities and partners’ capital
$
6,041,567

 
$
6,919,785


See notes to consolidated financial statements.

4
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MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Nine Months Ended
 
September 30,
 
2015
 
2016
Operating Activities:
 
 
 
Net income
$
611,999

 
$
589,480

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
124,180

 
134,137

Loss on sale and retirement of assets
4,378

 
5,397

Earnings of non-controlled entities
(49,653
)
 
(51,543
)
Distributions of earnings from investments in non-controlled entities
47,236

 
50,047

Equity-based incentive compensation expense
15,226

 
14,737

Settlement cost, amortization of prior service credit and actuarial loss
2,609

 
1,427

Gain on exchange of interest in non-controlled entity
—

 
(28,144
)
Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable and other accounts receivable
(24,601
)
 
(49,014
)
Inventory
22,581

 
7,857

Energy commodity derivatives contracts, net of derivatives deposits
(11,402
)
 
637

Accounts payable
12,226

 
5,850

Accrued payroll and benefits
452

 
(12,725
)
Accrued interest payable
(841
)
 
(2,393
)
Accrued taxes other than income
6,334

 
2,115

Accrued product purchases
(23,947
)
 
(6,183
)
Deferred revenue
4,141

 
17,191

Current and noncurrent environmental liabilities
(4,864
)
 
(5,649
)
Other current and noncurrent assets and liabilities
(11,950
)
 
(34,229
)
Net cash provided by operating activities
724,104

 
638,995

Investing Activities:
 
 
 
Additions to property, plant and equipment, net(1)
(431,260
)
 
(517,810
)
Proceeds from sale and disposition of assets
3,178

 
6,098

Acquisition of business
(54,678
)
 
—

Investments in non-controlled entities
(133,373
)
 
(174,900
)
Distributions in excess of earnings of non-controlled entities
9,341

 
4,500

Net cash used by investing activities
(606,792
)
 
(682,112
)
Financing Activities:
 
 
 
Distributions paid
(489,535
)
 
(548,388
)
Net commercial paper repayments
(69,976
)
 
(244,963
)
Borrowings under long-term notes
499,589

 
1,142,997

Debt placement costs
(4,754
)
 
(10,500
)
Net payment on financial derivatives
(42,908
)
 
(19,287
)
Settlement of tax withholdings on long-term incentive compensation
(17,784
)
 
(14,376
)
Net cash provided (used) by financing activities
(125,368
)
 
305,483

Change in cash and cash equivalents
(8,056
)
 
262,366

Cash and cash equivalents at beginning of period
17,063

 
28,731

Cash and cash equivalents at end of period
$
9,007

 
$
291,097

 
 
 
 
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
$
8,045

 
$
7,092

 
 
 
 
(1)   Additions to property, plant and equipment
$
(439,721
)
 
$
(514,205
)
Changes in accounts payable and other current liabilities related to capital expenditures
8,461

 
(3,605
)
Additions to property, plant and equipment, net
$
(431,260
)
 
$
(517,810
)

See notes to consolidated financial statements.

5
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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 September 30, 2016, our asset portfolio, including the assets of our joint ventures, consisted of:

•
our refined products segment, comprised of our 9,700-mile refined products pipeline system with 53 terminals as well as 26 independent terminals not connected to our pipeline system and our 1,100-mile ammonia pipeline system;

•
our crude oil segment, comprised of approximately 2,100 miles of crude oil pipelines and storage facilities with an aggregate storage capacity of approximately 23 million barrels, of which approximately 15 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.

Terminology common in our industry includes the following terms, which describe products that we transport, store and distribute through our pipelines and terminals:

•
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, 2015, which is derived from our audited financial statements, include all normal and recurring adjustments necessary to present fairly our financial position as of September 30, 2016, the results of operations for the three and nine months ended September 30, 2015 and 2016 and cash flows for the nine months ended September 30, 2015 and 2016. The results of operations for the nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the full year ending December 31, 2016 for several reasons. Profits from our butane 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 impacts the profits from our commodity activities and, to a lesser extent, the volume of petroleum products we transport 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 U.S. generally accepted accounting principles (“GAAP”). 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, 2015.

Use of Estimates

The preparation of our consolidated financial statements in conformity with 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.

New Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is part of the FASB’s initiative to simplify accounting standards. The guidance requires an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur, and allows equity classification for awards where employees elect to withhold up to the maximum statutory tax rates in the applicable jurisdictions. The new standard also requires cash paid by employers when directly withholding shares for tax withholding purposes to be classified as a financing activity in the statement of cash flows.

We elected to early adopt ASU 2016-09 during the first quarter of 2016, and this adoption did not have a material impact on our consolidated financial statements. In conjunction with our adoption of this new accounting standard, we have elected to account for equity-based compensation forfeitures as they occur. Additionally, and consistent with our prior accounting policy, we continue to show cash paid when directly withholding shares for tax withholding purposes as a financing activity in our statements of cash flows.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires lessees to recognize a right of use asset and lease liability on the balance sheet for all leases, with the exception of short-term leases. The new accounting model for lessors remains largely the same, although some changes have been made to align it with the new lessee model and the new revenue recognition guidance. This update also requires companies to include additional disclosures regarding their lessee and lessor agreements. Public companies are required to adopt the

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



standard for financial reporting periods that start after December 15, 2018, although early adoption is permitted. We are currently in the process of evaluating the impact this new standard will have on our financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which eliminates the industry-specific guidance in U.S. GAAP and produces a single, principles-based method for companies to report revenue in their financial statements. This standard requires companies to make more estimates and use more judgment than under current guidance. In addition, all companies must compile more extensive footnote disclosures about how the revenue numbers were derived. This ASU requires full retrospective, modified retrospective or use of the cumulative effect method during the period of adoption. In July 2015, the FASB extended the effective date of this standard from January 1, 2017 to January 1, 2018. We are currently in the process of evaluating the impact this new standard will have on our financial statements.


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 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 revenue. 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 operations, are reported as product sales revenue on our consolidated statements of income.
For the three and nine months ended September 30, 2015 and 2016, product sales revenue included the following (in thousands): 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2016
 
2015
 
2016
Physical sale of petroleum products
$
100,829

 
$
146,006

 
$
403,395

 
$
412,045

Change in value of NYMEX contracts
71,902

 
(12,650
)
 
52,432

 
(8,438
)
Total product sales revenue
$
172,731

 
$
133,356

 
$
455,827

 
$
403,607



3.
Segment Disclosures

Our reportable segments are strategic business units that offer different products and services. Our segments are managed separately as 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”) expense that management does not consider when evaluating the core profitability of our separate operating segments.


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



 
Three Months Ended September 30, 2015
 
(in thousands)
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenue
$
264,156

 
$
101,122

 
$
45,109

 
$
—

 
$
410,387

Product sales revenue
171,775

 
—

 
956

 
—

 
172,731

Affiliate management fee revenue
—

 
3,211

 
346

 
—

 
3,557

Total revenue
435,931

 
104,333

 
46,411

 
—

 
586,675

Operating expenses
108,972

 
24,572

 
14,700

 
(895
)
 
147,349

Cost of product sales
85,341

 
—

 
181

 
—

 
85,522

Losses (earnings) of non-controlled entities
48

 
(14,906
)
 
(663
)
 
—

 
(15,521
)
Operating margin
241,570

 
94,667

 
32,193

 
895

 
369,325

Depreciation and amortization expense
24,333

 
9,502

 
7,313

 
895

 
42,043

G&A expenses
22,238

 
9,818

 
5,556

 
—

 
37,612

Operating profit
$
194,999

 
$
75,347

 
$
19,324

 
$
—

 
$
289,670

 
 
Three Months Ended September 30, 2016
 
(in thousands)
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenue
$
267,339

 
$
100,113

 
$
46,182

 
$
(201
)
 
$
413,433

Product sales revenue
105,834

 
24,750

 
2,772

 
—

 
133,356

Affiliate management fee revenue
218

 
4,416

 
359

 
—

 
4,993

Total revenue
373,391

 
129,279

 
49,313

 
(201
)
 
551,782

Operating expenses
95,776

 
24,628

 
16,374

 
(1,492
)
 
135,286

Cost of product sales
93,761

 
24,108

 
373

 
—

 
118,242

Losses (earnings) of non-controlled entities
272

 
(18,180
)
 
(668
)
 
—

 
(18,576
)
Operating margin
183,582

 
98,723

 
33,234

 
1,291

 
316,830

Depreciation and amortization expense
28,432

 
9,333

 
8,025

 
1,291

 
47,081

G&A expenses
22,993

 
8,493

 
4,314

 
—

 
35,800

Operating profit
$
132,157

 
$
80,897

 
$
20,895

 
$
—

 
$
233,949


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



 
Nine Months Ended September 30, 2015
 
(in thousands)
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenue
$
723,156

 
$
294,023

 
$
131,921

 
$
—

 
$
1,149,100

Product sales revenue
453,737

 
—

 
2,090

 
—

 
455,827

Affiliate management fee revenue
—

 
9,449

 
1,029

 
—

 
10,478

Total revenue
1,176,893

 
303,472

 
135,040

 
—

 
1,615,405

Operating expenses
288,265

 
65,032

 
45,916

 
(2,839
)
 
396,374

Cost of product sales
315,301

 
—

 
907

 
—

 
316,208

Losses (earnings) of non-controlled entities
146

 
(47,735
)
 
(2,064
)
 
—

 
(49,653
)
Operating margin
573,181

 
286,175

 
90,281

 
2,839

 
952,476

Depreciation and amortization expense
71,742

 
25,995

 
23,604

 
2,839

 
124,180

G&A expenses
68,730

 
26,935

 
15,387

 
—

 
111,052

Operating profit
$
432,709

 
$
233,245

 
$
51,290

 
$
—

 
$
717,244

 
 
 
 
 
 
 
 
 
 

 
 
Nine Months Ended September 30, 2016
 
(in thousands)
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenue
$
739,931

 
$
303,181

 
$
132,837

 
$
(201
)
 
$
1,175,748

Product sales revenue
372,061

 
26,465

 
5,081

 
—

 
403,607

Affiliate management fee revenue
422

 
9,686

 
1,032

 
—

 
11,140

Total revenue
1,112,414

 
339,332

 
138,950

 
(201
)
 
1,590,495

Operating expenses
280,261

 
66,370

 
49,897

 
(3,847
)
 
392,681

Cost of product sales
300,009

 
26,469

 
1,052

 
—

 
327,530

Losses (earnings) of non-controlled entities
352

 
(49,870
)
 
(2,025
)
 
—

 
(51,543
)
Operating margin
531,792

 
296,363

 
90,026

 
3,646

 
921,827

Depreciation and amortization expense
78,523

 
28,264

 
23,704

 
3,646

 
134,137

G&A expenses
68,852

 
27,419

 
14,945

 
—

 
111,216

Operating profit
$
384,417

 
$
240,680

 
$
51,377

 
$
—

 
$
676,474

 
 
 
 
 
 
 
 
 
 



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



4.
Investments in Non-Controlled Entities

Our investments in non-controlled entities at September 30, 2016 were comprised of:
Entity
 
Ownership Interest
BridgeTex Pipeline Company, LLC (“BridgeTex”)
 
50%
Double Eagle Pipeline LLC (“Double Eagle”)
 
50%
HoustonLink Pipeline Company, LLC (“HoustonLink”)
 
50%
Powder Springs Logistics, LLC (“Powder Springs”)
 
50%
Saddlehorn Pipeline Company, LLC (“Saddlehorn”)
 
40%
Seabrook Logistics, LLC (“Seabrook”)
 
50%
Texas Frontera, LLC (“Texas Frontera”)
 
50%

In February 2016, we transferred our 50% membership interest in Osage Pipe Line Company, LLC (“Osage”) to an affiliate of HollyFrontier Corporation. In conjunction with this transaction, we entered into several commercial agreements with affiliates of HollyFrontier Corporation. We recorded these commercial agreements as $43.7 million of intangible assets and $8.3 million of other receivables in our consolidated balance sheets. The intangible assets will be amortized over the 20-year life of the contracts received. The total gain recorded in 2016 was $28.1 million.

The management fees we have recognized from BridgeTex, Osage, Powder Springs, Saddlehorn and Texas Frontera are reported as affiliate management fee revenue on our consolidated statements of income.  In addition, we receive reimbursement from certain of our joint ventures for costs incurred during construction, which we included as reductions to costs and expenses on our consolidated statements of income. These construction cost reimbursements totaled $1.2 million and $2.7 million during the three and nine months ended September 30, 2016, respectively.

We recognized pipeline capacity lease revenue from BridgeTex of $8.9 million and $8.9 million for the three months ended September 30, 2015 and 2016, respectively, and $25.8 million and $26.6 million for the nine months ended September 30, 2015 and 2016, respectively, which we included in transportation and terminals revenue on our consolidated statements of income.

We recognized throughput revenue from Double Eagle of $0.8 million and $0.9 million for the three months ended September 30, 2015 and 2016, respectively, and $2.6 million and $2.5 million for the nine months ended September 30, 2015 and 2016, respectively, which we included in transportation and terminals revenue on our consolidated statements of income.  At December 31, 2015 and September 30, 2016, respectively, we recognized a $0.2 million and $0.3 million trade accounts receivable from Double Eagle.

At September 30, 2016, we recognized $2.9 million, $1.4 million and $0.5 million of other receivables from Saddlehorn, BridgeTex and Powder Springs, respectively, related to the activities detailed above and miscellaneous cost reimbursements. These receivables are reported in our balance sheets as other accounts receivable.

The financial results from Texas Frontera are included in our marine storage segment, the financial results from BridgeTex, Double Eagle, HoustonLink, Osage, Saddlehorn and Seabrook are included in our crude oil segment and the financial results from Powder Springs are included in our refined products segment, each 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, 2015
 
$
495,267

 
$
270,361

 
$
765,628

Additional investment
 
31,503

 
143,397

 
174,900

Exchange of investment in non-controlled entity
 
—

 
(25,105
)
 
(25,105
)
Earnings of non-controlled entities:
 
 
 

 
 
Proportionate share of earnings
 
45,990

 
7,256

 
53,246

Amortization of excess investment and capitalized interest
 
(1,529
)
 
(174
)
 
(1,703
)
Earnings of non-controlled entities
 
44,461

 
7,082

 
51,543

Less:
 
 
 
 
 
 
Distributions of earnings from investments in non-controlled entities
 
44,461

 
5,586

 
50,047

Distributions in excess of earnings of non-controlled entities
 
3,333

 
1,167

 
4,500

Investments at September 30, 2016
 
$
523,437

 
$
388,982

 
$
912,419

 
 
 
 
 
 
 

Summarized financial information of our non-controlled entities for the three and nine months ended September 30, 2015 and 2016 follows (in thousands):
 
 
Three Months Ended September 30, 2015
 
Three Months Ended September 30, 2016
 
 
BridgeTex
 
All Others
 
Consolidated
 
BridgeTex
 
All Others
 
Consolidated
Revenue
 
$
47,555

 
$
12,530

 
$
60,085

 
$
55,843

 
$
14,022

 
$
69,865

Net income
 
$
28,150

 
$
4,151

 
$
32,301

 
$
33,514

 
$
5,149

 
$
38,663


 
 
Nine Months Ended September 30, 2015
 
Nine Months Ended September 30, 2016
 
 
BridgeTex
 
All Others
 
Consolidated
 
BridgeTex
 
All Others
 
Consolidated
Revenue
 
$
146,320

 
$
33,677

 
$
179,997

 
$
155,067

 
$
35,451

 
$
190,518

Net income
 
$
91,806

 
$
11,525

 
$
103,331

 
$
91,981

 
$
14,907

 
$
106,888

 
 
 
 
 
 
 
 
 
 
 
 
 



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



5.
Inventory

Inventory at December 31, 2015 and September 30, 2016 was as follows (in thousands):
 
 
December 31, 2015
 
September 30,
2016
Refined products
$
57,455

 
$
23,028

Crude oil
28,385

 
20,475

Transmix
21,297

 
33,108

Liquefied petroleum gases
17,954

 
40,684

Additives
5,777

 
5,716

Total inventory
$
130,868

 
$
123,011



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 nine months ended September 30, 2015 and 2016 (in thousands):
 
 
Three Months Ended
 
Three Months Ended
 
September 30, 2015
 
September 30, 2016
 
Pension
Benefits
 
Other  Postretirement
Benefits
 
Pension
Benefits
 
Other  Postretirement
Benefits
Components of net periodic benefit costs:
 
 
 
 
 
 
 
Service cost
$
4,723

 
$
61

 
$
4,555

 
$
53

Interest cost
1,938

 
109

 
1,992

 
148

Expected return on plan assets
(2,009
)
 
—

 
(2,235
)
 
—

Amortization of prior service credit
—

 
(928
)
 
(45
)
 
(928
)
Amortization of actuarial loss
1,577

 
221

 
1,161

 
291

Settlement cost
—

 
—

 
202

 
—

Net periodic benefit cost (credit)
$
6,229

 
$
(537
)
 
$
5,630

 
$
(436
)

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



  
 
Nine Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2016
 
Pension
Benefits
 
Other  Postretirement
Benefits
 
Pension
Benefits
 
Other  Postretirement
Benefits
Components of net periodic benefit costs:
 
 
 
 
 
 
 
Service cost
$
14,168

 
$
183

 
$
13,648

 
$
176

Interest cost
5,815

 
328

 
5,970

 
368

Expected return on plan assets
(6,028
)
 
—

 
(6,694
)
 
—

Amortization of prior service credit
—

 
(2,784
)
 
(135
)
 
(2,785
)
Amortization of actuarial loss
4,730

 
663

 
3,485

 
660

Settlement cost
—

 
—

 
202

 
—

Net periodic benefit cost (credit)
$
18,685

 
$
(1,610
)
 
$
16,476

 
$
(1,581
)
 
 
 
 
 
 
 
 

Contributions estimated to be paid into the plans in 2016 are $26.0 million and $0.5 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 $1.8 million and $2.4 million, respectively, for the three months ended September 30, 2015 and 2016 and $6.8 million and $7.8 million, respectively, for the nine months ended September 30, 2015 and 2016.


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



Amounts Included in AOCL

The changes in AOCL related to employee benefit plan assets and benefit obligations for the three and nine months ended September 30, 2015 and 2016 were as follows (in thousands):
 
 
Three Months Ended
 
Three Months Ended
 
 
September 30, 2015
 
September 30, 2016
Gains (Losses) Included in AOCL
 
Pension Benefits
 
Other Postretirement Benefits
 
Pension Benefits
 
Other Postretirement Benefits
Beginning balance
 
$
(60,104
)
 
$
(3,110
)
 
$
(60,045
)
 
$
(5,433
)
Amortization of prior service credit
 
—

 
(928
)
 
(45
)
 
(928
)
Amortization of actuarial loss
 
1,577

 
221

 
1,161

 
291

Settlement cost
 
—

 
—

 
202

 
—

Ending balance
 
$
(58,527
)
 
$
(3,817
)
 
$
(58,727
)
 
$
(6,070
)
 
 
Nine Months Ended
 
Nine Months Ended
 
 
September 30, 2015
 
September 30, 2016
Gains (Losses) Included in AOCL
 
Pension Benefits
 
Other Postretirement Benefits
 
Pension Benefits
 
Other Postretirement Benefits
Beginning balance
 
$
(63,257
)
 
$
(1,696
)
 
$
(62,279
)
 
$
(3,945
)
Amortization of prior service credit
 
—

 
(2,784
)
 
(135
)
 
(2,785
)
Amortization of actuarial loss
 
4,730

 
663

 
3,485

 
660

Settlement cost
 
—

 
—

 
202

 
—

Ending balance
 
$
(58,527
)
 
$
(3,817
)
 
$
(58,727
)
 
$
(6,070
)
 
 
 
 
 
 
 
 
 



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



7.
Debt
The carrying amount of our consolidated debt at December 31, 2015 and September 30, 2016 was as follows (in thousands, except as otherwise noted):
 
 
December 31, 2015
 
September 30,
2016
 
Weighted-Average
Interest Rate for the Nine Months Ended September 30, 2016 (1)
Commercial paper(2)
 
$
279,801

 
$
34,880

 
0.8%
$250.0 million of 5.65% Notes due 2016(3)
 
250,208

 
250,020

 
5.7%
$250.0 million of 6.40% Notes due 2018
 
254,694

 
253,298

 
5.5%
$550.0 million of 6.55% Notes due 2019
 
562,600

 
560,042

 
5.7%
$550.0 million of 4.25% Notes due 2021
 
553,002

 
552,620

 
4.1%
$250.0 million of 3.20% Notes due 2025
 
247,788

 
247,967

 
3.2%
$650.0 million of 5.00% Notes due 2026(2)
 
—

 
644,129

 
5.1%
$250.0 million of 6.40% Notes due 2037
 
247,230

 
247,312

 
6.4%
$250.0 million of 4.20% Notes due 2042
 
246,142

 
246,230

 
4.3%
$550.0 million of 5.15% Notes due 2043
 
550,819

 
550,885

 
5.1%
$250.0 million of 4.20% Notes due 2045
 
247,338

 
247,408

 
4.7%
$500.0 million of 4.25% Notes due 2046(2)
 
—

 
488,731

 
4.8%
Total debt
 
3,439,622

 
4,323,522

 
4.9%
Less: current portion of long-term debt, net
 
250,335

 
250,020

 
 
Long-term debt, net(4)
 
$
3,189,287

 
$
4,073,502

 
 
 
 
 
 
 
 
 

(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 nine-month period ending September 30, 2016. The weighted-average interest rate for these borrowings was calculated based on the number of days the borrowings were outstanding during the noted period.

(3)
These borrowings will mature in October 2016 and are reflected in current debt on our consolidated balance sheets at December 31, 2015 and September 30, 2016.

(4)
Long-term debt is presented net of unamortized debt issuance costs of $18.7 million and $27.4 million at December 31, 2015 and September 30, 2016, respectively.

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

The face value of our debt at December 31, 2015 and September 30, 2016 was $3.4 billion and $4.3 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.

2016 Debt Offering

In September 2016, we issued $500.0 million of our 4.25% notes due 2046 in an underwritten public offering. The notes were issued at 98.762% of par. Net proceeds from this offering were approximately $488.7 million, after underwriting discounts and offering expenses of $5.1 million. The net proceeds from this offering were used to repay our 5.65% senior notes when due in October 2016 and to repay borrowings outstanding under our commercial paper program. The remaining proceeds may be used for general partnership purposes, which may include capital expenditures.
 


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



In February 2016, we issued $650.0 million of our 5.00% notes due 2026 in an underwritten public offering. The notes were issued at 99.875% of par. Net proceeds from this offering were approximately $643.8 million, after underwriting discounts and offering expenses of $5.4 million. The net proceeds from this offering were used to repay borrowings outstanding under our commercial paper program and for general partnership purposes, including expansion capital.

Other Debt

Revolving Credit Facilities. At September 30, 2016, the total borrowing capacity under our revolving credit facility with a maturity date of October 27, 2020 was $1.0 billion. Any borrowings outstanding under this facility are classified as long-term debt on our consolidated balance sheets. Borrowings under this facility are unsecured and bear interest at LIBOR plus a spread ranging from 1.000% to 1.625% based on our credit ratings. Additionally, an unused commitment fee is assessed at a rate between 0.100% and 0.275% depending on our credit ratings. The unused commitment fee was 0.125% at September 30, 2016. Borrowings under this facility may be used for general partnership purposes, including capital expenditures. As of December 31, 2015 and September 30, 2016, respectively, there were no borrowings outstanding under this facility, with $6.3 million 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 this facility.

At September 30, 2016, the total borrowing capacity under our 364-day credit facility was $250.0 million. The maturity date of this credit facility is October 25, 2016. See Note 14 – Subsequent Events for recent information about this credit facility. Any borrowings under this credit facility are classified as current debt on our consolidated balance sheets. Borrowings under this facility are unsecured and bear interest at LIBOR plus a spread ranging from 1.000% to 1.625% based on our credit ratings. Additionally, an unused commitment fee is assessed at a rate between 0.080% and 0.225% depending on our credit ratings. The unused commitment fee was 0.100% at September 30, 2016. Borrowings under this facility may be used for general partnership purposes, including capital expenditures. As of December 31, 2015 and September 30, 2016, respectively, there were no borrowings outstanding under this 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 is classified as long-term debt.


8.
Derivative Financial Instruments

Interest Rate Derivatives

We periodically enter into interest rate derivatives to hedge the fair value of our debt or interest on 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.

During 2016, we entered into $100.0 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 anticipate issuing in 2018. The fair values of these contracts at September 30, 2016 were recorded on our balance sheets as an other noncurrent liability of $3.5 million, with the offset recorded to other comprehensive income. We account for these agreements as cash flow hedges.

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




During 2015 and 2016, 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 2016. We accounted for these agreements as cash flow hedges. When we issued $500.0 million of 4.25% notes due 2046 in September 2016, we settled the associated interest rate swap agreements for a loss of $19.3 million. The loss was recorded to other comprehensive income and will be recognized into earnings as an adjustment to our periodic interest expense accruals over the first ten-year payment period 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 2016.

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 purchases and sales are accounted for using traditional accrual accounting.

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 fair 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 fair 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 are 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 nine months ended September 30, 2015 and 2016, 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 AOCL and any ineffectiveness

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



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 hold petroleum product inventories that we obtain 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 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 a long-term asset on our consolidated balance sheets as tank bottoms. 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.

As outlined in the table below, our open NYMEX contracts at September 30, 2016 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
 
November 2017
NYMEX - Economic Hedges
 
5.1 million barrels of refined products and crude oil
 
Between October 2016 and April 2017
NYMEX - Economic Hedges
 
1.3 million barrels of future purchases of butane
 
Between October 2016 and April 2017

Energy Commodity Derivatives Contracts and Deposits Offsets

At September 30, 2016, we had made margin deposits of $30.6 million for our NYMEX contracts with our counterparties, which were recorded as a current asset under energy commodity derivatives deposits on our consolidated balance sheets. 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, 2015 and September 30, 2016 (in thousands):
 
 
December 31, 2015
Description
 
Gross Amounts of Recognized Assets
 
Gross Amounts of Liabilities Offset in the Consolidated Balance Sheets
 
Net Amounts of Assets Presented in the Consolidated Balance Sheets(1)
 
Margin Deposit Amounts Not Offset in the Consolidated Balance Sheets
 
Net Asset Amount(3)
Energy commodity derivatives
 
$
48,367

 
$
(5,646
)
 
$
42,721

 
$
(24,252
)
 
$
18,469

 
 
 
 
 
 
 
 
 
 
 

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



 
 
September 30, 2016
Description
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts of Assets Offset in the Consolidated Balance Sheets
 
Net Amounts of Liabilities Presented in the Consolidated Balance Sheets(2)
 
Margin Deposit Amounts Not Offset in the Consolidated Balance Sheets
 
Net Asset Amount(3)
Energy commodity derivatives
 
$
(15,576
)
 
$
3,247

 
$
(12,329
)
 
$
30,559

 
$
18,230

 
 
 
 
 
 
 
 
 
 
 

(1)
Net amount includes energy commodity derivative contracts classified as current assets, net, of $39,243 and noncurrent assets of $3,478.
(2)
Net amount includes energy commodity derivative contracts classified as current liabilities, net, of $12,430 and noncurrent assets of $101.
(3)
Amount represents the maximum loss we would incur if all of our counterparties failed to perform on their derivative contracts.

Impact of Derivatives on Our Financial Statements

Comprehensive Income

The changes in derivative activity included in AOCL for the three and nine months ended September 30, 2015 and 2016 were as follows (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
Derivative Losses Included in AOCL
2015
 
2016
 
2015
 
2016
Beginning balance
$
(29,528
)
 
$
(50,459
)
 
$
(16,587
)
 
$
(30,126
)
Net loss on cash flow hedges
(3,410
)
 
(3,169
)
 
(16,939
)
 
(24,278
)
Reclassification of net loss on cash flow hedges to income
388

 
512

 
976

 
1,288

Ending balance
$
(32,550
)
 
$
(53,116
)
 
$
(32,550
)
 
$
(53,116
)
Income Statements
The following tables provide a summary of the effect on our consolidated statements of income for the three and nine months ended September 30, 2015 and 2016 of derivatives accounted for under ASC 815-30, Derivatives and Hedging—Cash Flow Hedges, that were designated as hedging instruments (in thousands):
 
 
Three Months Ended September 30, 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
 
 
$
(3,410
)
 
 
Interest expense
 
 
$
(388
)
 
 
 
$
—

 
 
 
Three Months Ended September 30, 2016
 
 
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
 
 
$
(3,169
)
 
 
Interest expense
 
 
$
(512
)
 
 
 
$
—

 

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



 
 
Nine Months Ended September 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
 
 
$
(16,939
)
 
 
Interest expense
 
 
$
(976
)
 
 
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
 
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
 
 
$
(24,278
)
 
 
Interest expense
 
 
$
(1,288
)
 
 
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2016, the net loss estimated to be classified to interest expense over the next twelve months from AOCL is approximately $3.0 million.

During 2015 and 2016, 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, 2015 and September 30, 2016 of $27.9 million and $17.6 million, respectively, from these agreements were offset by a cumulative decrease to tank bottoms. 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 months ended September 30, 2015 and 2016, we recognized a gain (loss) of $(1.7) million and $0.3 million, respectively, and for the nine months ended September 30, 2015 and 2016, we recognized a gain of $4.6 million and $4.5 million, respectively, for the amounts we excluded from the assessment of effectiveness of these fair value hedges, which we reported as other income/expense on our consolidated statements of income.
The following table provides a summary of the effect on our consolidated statements of income for the three and nine months ended September 30, 2015 and 2016 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 Derivatives
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
Location of Gain (Loss)
Recognized on Derivatives
 
September 30,
 
September 30,
Derivative Instrument
 
 
2015
 
2016
 
2015
 
2016
NYMEX commodity contracts
 
Product sales revenue
 
$
71,902

 
$
(12,650
)
 
$
52,432

 
$
(8,438
)
NYMEX commodity contracts
 
Operating expenses
 
14,761

 
4,212

 
7,181

 
(1,192
)
NYMEX commodity contracts
 
Cost of product sales
 
(3,767
)
 
831

 
(5,847
)
 
3,643

 
 
Total
 
$
82,896

 
$
(7,607
)
 
$
53,766

 
$
(5,987
)
The impact of the derivatives in the above table was reflected as cash from operations on our consolidated statements of cash flows.

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



Balance Sheets
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, 2015 and September 30, 2016 (in thousands):
 
 
December 31, 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
 
$
60

 
Energy commodity derivatives contracts, net
 
$
—

NYMEX commodity contracts
 
Other noncurrent assets
 
3,478

 
Other noncurrent liabilities
 
—

Interest rate contracts
 
Other current assets
 
2,179

 
Other current liabilities
 
653

 
 
Total
 
$
5,717

 
Total
 
$
653

 
 
 
September 30, 2016
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
NYMEX commodity contracts
 
Other noncurrent assets
 
$
101

 
Other noncurrent liabilities
 
$
—

Interest rate contracts
 
Other noncurrent assets
 
—

 
Other noncurrent liabilities
 
3,465

 
 
Total
 
$
101

 
Total
 
$
3,465

 

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, 2015 and September 30, 2016 (in thousands):
 
 
December 31, 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
 
$
44,829

 
Energy commodity derivatives contracts, net
 
$
5,646

 
 
 
 
 
 
 
 
 
 
 
September 30, 2016
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
NYMEX commodity contracts
 
Energy commodity derivatives contracts, net
 
$
3,146

 
Energy commodity derivatives contracts, net
 
$
15,576

 


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



9.
Commitments and Contingencies

Environmental Liabilities

Liabilities recognized for estimated environmental costs were $31.4 million and $25.8 million at December 31, 2015 and September 30, 2016, 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 substantially paid over the next 9 years. Environmental expense recognized as a result of changes in our environmental liabilities are generally included in operating expenses on our consolidated statements of income. Environmental expenses were $1.3 million and $0.3 million for the three months ended September 30, 2015 and 2016, respectively, and $5.6 million and $4.6 million for the nine months ended September 30, 2015 and 2016, respectively.

Environmental Receivables

Receivables from insurance carriers and other third parties related to environmental matters were $2.6 million at December 31, 2015, of which $0.7 million and $1.9 million were recorded to other accounts receivable and long-term receivables, respectively, on our consolidated balance sheets. Receivables from insurance carriers and other third parties related to environmental matters were $2.0 million at September 30, 2016, of which $0.8 million and $1.2 million were recorded to other accounts receivable and long-term receivables, respectively, on our consolidated balance sheets.
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. See Note 14 – Subsequent Events for additional information about a recent event.

10.
Long-Term Incentive Plan
We have a long-term incentive plan (“LTIP”) for certain of our employees and directors of our general partner. The LTIP primarily consists of phantom units and permits the grant of awards covering an aggregate payout of 11.9 million of our limited partner units. The compensation committee of our general partner’s board of directors administers our LTIP. The estimated units remaining available under the LTIP at September 30, 2016 total 3.0 million.
 

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



Our equity-based incentive compensation expense (benefit) was as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2015
 
Equity Method
 
Liability Method
 
Total
 
Equity
Method
 
Liability
Method
 
Total
Performance-based awards:
 
 
 
 
 
 
 
 
 
 
 
2013 awards
$
1,673

 
$
(590
)
 
$
1,083

 
$
6,246

 
$
501

 
$
6,747

2014 awards
1,497

 
—

 
1,497

 
3,980

 
—

 
3,980

2015 awards
1,727

 
—

 
1,727

 
3,687

 
—

 
3,687

Time-based awards
380

 
—

 
380

 
812

 
—

 
812

Total
$
5,277

 
$
(590
)
 
$
4,687

 
$
14,725

 
$
501

 
$
15,226

 
 
 
 
 
 
 
 
 
 
 
 
Allocation of LTIP expense on our consolidated statements of income:
G&A expense
 
 
 
 
$
4,643

 
 
 
 
 
$
15,016

Operating expense
 
 
 
 
44

 
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