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 June 30, 2017
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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x    Accelerated filer £    Non-accelerated filer £ (Do not check if a smaller reporting company)    
Smaller reporting company £ Emerging growth company £
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. £
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes  £    No  x
As of August 1, 2017, there were 228,024,556 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,
 
2016
 
2017
 
2016
 
2017
Transportation and terminals revenue
$
392,240

 
$
433,239

 
$
762,315

 
$
825,910

Product sales revenue
123,689

 
182,004

 
270,251

 
427,624

Affiliate management fee revenue
2,968

 
4,197

 
6,147

 
7,980

Total revenue
518,897

 
619,440

 
1,038,713

 
1,261,514

Costs and expenses:
 
 
 
 
 
 
 
Operating
134,183

 
145,294

 
257,096

 
276,886

Cost of product sales
95,703

 
145,975

 
209,288

 
318,851

Depreciation and amortization
43,302

 
48,896

 
87,056

 
96,194

General and administrative
34,554

 
43,393

 
75,230

 
83,674

Total costs and expenses
307,742

 
383,558

 
628,670

 
775,605

Earnings of non-controlled entities
15,339

 
25,576

 
32,967

 
47,022

Operating profit
226,494

 
261,458

 
443,010

 
532,931

Interest expense
48,686

 
51,546

 
92,410

 
102,758

Interest income
(404
)
 
(256
)
 
(765
)
 
(548
)
Interest capitalized
(7,130
)
 
(3,183
)
 
(13,266
)
 
(7,380
)
Gain on exchange of interest in non-controlled entity
(1,244
)
 
—

 
(28,144
)
 
—

Other expense (income)
(1,958
)
 
2,043

 
(3,710
)
 
3,213

Income before provision for income taxes
188,544

 
211,308

 
396,485

 
434,888

Provision for income taxes
685

 
908

 
1,556

 
1,752

Net income
$
187,859

 
$
210,400

 
$
394,929

 
$
433,136

Basic net income per limited partner unit
$
0.82

 
$
0.92

 
$
1.73

 
$
1.90

Diluted net income per limited partner unit
$
0.82

 
$
0.92

 
$
1.73

 
$
1.90

Weighted average number of limited partner units outstanding used for basic net income per unit calculation(1)
227,952

 
228,192

 
227,889

 
228,151

Weighted average number of limited partner units outstanding used for diluted net income per unit calculation(1)
227,983

 
228,245

 
227,921

 
228,202


(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 June 30,
 
Six Months Ended June 30,
 
2016
 
2017
 
2016
 
2017
Net income
$
187,859

 
$
210,400

 
$
394,929

 
$
433,136

Other comprehensive income:
 
 

 
 
 

Derivative activity:
 
 
 
 
 
 
 
Net gain (loss) on cash flow hedges(1)
(8,631
)
 
(2,802
)
 
(21,109
)
 
(1,507
)
Reclassification of net (gain) loss on cash flow hedges to income(1)  
388

 
739

 
776

 
1,479

Changes in employee benefit plan assets and benefit obligations recognized in other comprehensive income:
 
 
 
 
 
 
 
Amortization of prior service credit(2)
(974
)
 
(46
)
 
(1,947
)
 
(91
)
Amortization of actuarial loss(2)
1,292

 
1,983

 
2,693

 
3,211

Settlement cost(2)
—

 
361

 
—

 
1,726

Total other comprehensive income (loss)
(7,925
)
 
235

 
(19,587
)
 
4,818

Comprehensive income
$
179,934

 
$
210,635

 
$
375,342

 
$
437,954

(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,
2016
 
June 30,
2017
ASSETS
 
 
(Unaudited)
Current assets:
 
 
 
Cash and cash equivalents
$
14,701

 
$
5,471

Trade accounts receivable
105,689

 
113,233

Other accounts receivable
25,761

 
12,636

Inventory
134,378

 
119,451

Energy commodity derivatives contracts, net
—

 
4,250

Energy commodity derivatives deposits
49,899

 
4,492

Other current assets
39,966

 
66,123

Total current assets
370,394

 
325,656

Property, plant and equipment
6,783,737

 
7,048,502

Less: Accumulated depreciation
1,507,996

 
1,592,035

Net property, plant and equipment
5,275,741

 
5,456,467

Investments in non-controlled entities
931,255

 
976,456

Long-term receivables
23,870

 
22,532

Goodwill
53,260

 
53,260

Other intangibles (less accumulated amortization of $2,136 and $1,228 at December 31, 2016 and June 30, 2017, respectively)
51,976

 
52,925

Other noncurrent assets
65,577

 
43,426

Total assets
$
6,772,073

 
$
6,930,722

 
 
 
 
LIABILITIES AND PARTNERS’ CAPITAL
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
77,248

 
$
103,100

Accrued payroll and benefits
45,690

 
40,181

Accrued interest payable
65,643

 
65,459

Accrued taxes other than income
50,166

 
43,409

Environmental liabilities
10,249

 
6,466

Deferred revenue
101,891

 
115,023

Accrued product purchases
51,600

 
46,803

Energy commodity derivatives contracts, net
30,738

 
—

Energy commodity derivatives deposits
—

 
119

Other current liabilities
48,431

 
36,015

Total current liabilities
481,656

 
456,575

Long-term debt, net
4,087,192

 
4,231,912

Long-term pension and benefits
71,461

 
68,444

Other noncurrent liabilities
25,868

 
27,137

Environmental liabilities
13,791

 
12,385

Commitments and contingencies

 

Partners’ capital:
 
 
 
Limited partner unitholders (227,784 units and 228,025 units outstanding at December 31, 2016 and June 30, 2017, respectively)
2,193,346

 
2,230,692

Accumulated other comprehensive loss
(101,241
)
 
(96,423
)
Total partners’ capital
2,092,105

 
2,134,269

Total liabilities and partners’ capital
$
6,772,073

 
$
6,930,722




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,
 
2016
 
2017
Operating Activities:
 
 
 
Net income
$
394,929

 
$
433,136

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expense
87,056

 
96,194

Loss on sale and retirement of assets
3,263

 
5,331

Earnings of non-controlled entities
(32,967
)
 
(47,022
)
Distributions of earnings from investments in non-controlled entities
31,080

 
46,754

Equity-based incentive compensation expense
10,059

 
10,717

Settlement cost, amortization of prior service credit and actuarial loss
746

 
4,846

Gain on exchange of interest in non-controlled entity
(28,144
)
 
—

Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable and other accounts receivable
(10,703
)
 
2,681

Inventory
(25,562
)
 
14,927

Energy commodity derivatives contracts, net of derivatives deposits
(17,121
)
 
10,538

Accounts payable
9,125

 
13,132

Accrued payroll and benefits
(14,937
)
 
(5,509
)
Accrued interest payable
10,998

 
(184
)
Accrued taxes other than income
(6,463
)
 
(6,757
)
Accrued product purchases
(8,858
)
 
(4,797
)
Deferred revenue
16,935

 
13,132

Current and noncurrent environmental liabilities
(2,695
)
 
(5,189
)
Other current and noncurrent assets and liabilities
(9,673
)
 
(9,519
)
Net cash provided by operating activities
407,068

 
572,411

Investing Activities:
 
 
 
Additions to property, plant and equipment, net(1)
(310,133
)
 
(281,504
)
Proceeds from sale and disposition of assets
4,756

 
4,886

Investments in non-controlled entities
(109,933
)
 
(55,273
)
Distributions in excess of earnings of non-controlled entities
1,942

 
11,152

Net cash used by investing activities
(413,368
)
 
(320,739
)
Financing Activities:
 
 
 
Distributions paid
(361,605
)
 
(393,912
)
Net commercial paper borrowings (repayments)
(255,966
)
 
146,885

Borrowings under long-term notes
649,187

 
—

Debt placement costs
(5,408
)
 
—

Payments associated with settlement of equity-based incentive compensation
(14,376
)
 
(13,875
)
Net cash provided (used) by financing activities
11,832

 
(260,902
)
Change in cash and cash equivalents
5,532

 
(9,230
)
Cash and cash equivalents at beginning of period
28,731

 
14,701

Cash and cash equivalents at end of period
$
34,263

 
$
5,471

 
 
 
 
Supplemental non-cash investing and financing activities:
 
 
 
Issuance of limited partner units in settlement of equity-based incentive plan awards
$
7,092

 
$
1,669

 
 
 
 
(1)   Additions to property, plant and equipment
$
(321,085
)
 
$
(289,570
)
Changes in accounts payable and other current liabilities related to capital expenditures
10,952

 
8,066

Additions to property, plant and equipment, net
$
(310,133
)
 
$
(281,504
)





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. Magellan Midstream Partners, L.P. is a Delaware limited partnership and its 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 its 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, 2017, 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 2,200 miles of crude oil pipelines, our condensate splitter and storage facilities with an aggregate storage capacity of approximately 27 million barrels, of which approximately 17 million barrels are used for contract 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, 2016, 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, 2017, the results of operations for the three and six months ended June 30, 2016 and 2017 and cash flows for the six months ended June 30, 2016 and 2017. The results of operations for the six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the full year ending December 31, 2017 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, 2016.

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 2017, the Financial Accounting Standards Board (“ FASB”) issued Accounting Standards Update (“ASU”) 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires companies that offer postretirement benefits to present the service cost, which is the amount an employer has to set aside each period to cover the benefits, in the same line item with other employee compensation costs. Other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. Additionally, only the service cost component will be eligible for capitalization when applicable.

Public companies must comply with the new requirements under ASU 2017-07 for fiscal years that start after December 15, 2017, and the amendments must be applied retrospectively except for the capitalization change, which should be applied prospectively. Early adoption is allowed, and we elected to adopt ASU 2017-07 as of January 1, 2017. Prior to adoption, we expensed all components of pension expense through salaries and wages, which impacted operating income. We are now recording only the service component of pension expense to salaries and wages, with the remainder of the expense being recorded to other income and expense below operating profit. Comparative prior periods have been restated for this change. The changes were not material to our financial statements.

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

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



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 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 July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Prior to this update, reporting entities were required to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value or net realizable value less an approximately normal profit margin. Under this update, inventory is to be measured at the lower of cost or net realizable value, which is defined as the estimated selling price in the ordinary course of business, less reasonable predictable costs of completion, disposal and transportation. This ASU became effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. We adopted this standard on January 1, 2017, and it did not have a material impact on our results of operations, financial position or cash flows as we have historically measured our inventory at the lower of cost or net realizable value, as described above.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This ASU amends the existing accounting standards for revenue recognition and is based on the principle that revenue should be recognized to depict the transfer of goods or services to a customer at an amount that reflects the consideration a company expects to receive in exchange for those goods or services. We will adopt this ASU as required on January 1, 2018, using the full retrospective method of adoption. We do not expect the adoption of this ASU to have a material impact on our consolidated 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 exchange-based futures contracts. See Note 8 – Derivative Financial Instruments for a discussion of our commodity hedging strategies and how our futures 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, including tender deductions, are reported as product sales revenue on our consolidated statements of income.
For the three and six months ended June 30, 2016 and 2017, product sales revenue included the following (in thousands): 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2017
 
2016
 
2017
Physical sale of petroleum products
$
135,459

 
$
167,790

 
$
266,039

 
$
384,730

Change in value of futures contracts
(11,770
)
 
14,214

 
4,212

 
42,894

Total product sales revenue
$
123,689

 
$
182,004

 
$
270,251

 
$
427,624




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



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.

 
Three Months Ended June 30, 2016
 
(in thousands)
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenue
$
247,842

 
$
101,340

 
$
43,058

 
$
—

 
$
392,240

Product sales revenue
122,311

 
(28
)
 
1,406

 
—

 
123,689

Affiliate management fee revenue
124

 
2,486

 
358

 
—

 
2,968

Total revenue
370,277

 
103,798

 
44,822

 
—

 
518,897

Operating expenses
98,513

 
20,555

 
16,278

 
(1,163
)
 
134,183

Cost of product sales
94,392

 
1,016

 
295

 
—

 
95,703

(Earnings) losses of non-controlled entities
38

 
(14,711
)
 
(666
)
 
—

 
(15,339
)
Operating margin
177,334

 
96,938

 
28,915

 
1,163

 
304,350

Depreciation and amortization expense
24,971

 
9,062

 
8,106

 
1,163

 
43,302

G&A expense
20,506

 
9,149

 
4,899

 
—

 
34,554

Operating profit
$
131,857

 
$
78,727

 
$
15,910

 
$
—

 
$
226,494

 

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



 
Three Months Ended June 30, 2017
 
(in thousands)
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenue
$
277,883

 
$
108,455

 
$
47,794

 
$
(893
)
 
$
433,239

Product sales revenue
161,723

 
19,403

 
878

 
—

 
182,004

Affiliate management fee revenue
353

 
3,474

 
370

 
—

 
4,197

Total revenue
439,959

 
131,332

 
49,042

 
(893
)
 
619,440

Operating expenses
100,713

 
31,410

 
15,375

 
(2,204
)
 
145,294

Cost of product sales
125,220

 
18,607

 
2,148

 
—

 
145,975

(Earnings) losses of non-controlled entities
(422
)
 
(24,494
)
 
(660
)
 
—

 
(25,576
)
Operating margin
214,448

 
105,809

 
32,179

 
1,311

 
353,747

Depreciation and amortization expense
27,005

 
12,507

 
8,073

 
1,311

 
48,896

G&A expense
26,720

 
11,071

 
5,602

 
—

 
43,393

Operating profit
$
160,723

 
$
82,231

 
$
18,504

 
$
—

 
$
261,458

 
Six Months Ended June 30, 2016
 
(in thousands)
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenue
$
472,592

 
$
203,068

 
$
86,655

 
$
—

 
$
762,315

Product sales revenue
266,227

 
1,715

 
2,309

 
—

 
270,251

Affiliate management fee revenue
204

 
5,270

 
673

 
—

 
6,147

Total revenue
739,023

 
210,053

 
89,637

 
—

 
1,038,713

Operating expenses
184,287

 
41,681

 
33,483

 
(2,355
)
 
257,096

Cost of product sales
206,248

 
2,361

 
679

 
—

 
209,288

(Earnings) losses of non-controlled entities
80

 
(31,690
)
 
(1,357
)
 
—

 
(32,967
)
Operating margin
348,408

 
197,701

 
56,832

 
2,355

 
605,296

Depreciation and amortization expense
50,091

 
18,931

 
15,679

 
2,355

 
87,056

G&A expense
45,736

 
18,888

 
10,606

 
—

 
75,230

Operating profit
$
252,581

 
$
159,882

 
$
30,547

 
$
—

 
$
443,010

 
 
 
 
 
 
 
 
 
 

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



 
 
Six Months Ended June 30, 2017
 
(in thousands)
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenue
$
519,788

 
$
213,508

 
$
94,201

 
$
(1,587
)
 
$
825,910

Product sales revenue
401,893

 
22,506

 
3,225

 
—

 
427,624

Affiliate management fee revenue
682

 
6,608

 
690

 
—

 
7,980

Total revenue
922,363

 
242,622

 
98,116

 
(1,587
)
 
1,261,514

Operating expenses
194,246

 
58,828

 
28,030

 
(4,218
)
 
276,886

Cost of product sales
292,901

 
21,184

 
4,766

 
—

 
318,851

(Earnings) losses of non-controlled entities
(533
)
 
(45,144
)
 
(1,345
)
 
—

 
(47,022
)
Operating margin
435,749

 
207,754

 
66,665

 
2,631

 
712,799

Depreciation and amortization expense
53,971

 
23,363

 
16,229

 
2,631

 
96,194

G&A expense
51,621

 
21,110

 
10,943

 
—

 
83,674

Operating profit
$
330,157

 
$
163,281

 
$
39,493

 
$
—

 
$
532,931

 
 
 
 
 
 
 
 
 
 


4.
Investments in Non-Controlled Entities

Our investments in non-controlled entities at June 30, 2017 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%

We serve as operator of BridgeTex, HoustonLink, Powder Springs, Saddlehorn, Texas Frontera and the pipeline activities of Seabrook. We receive fees for management services as well as reimbursement or payment to us for certain direct operational payroll and other overhead costs. The management fees we have received are reported as affiliate management fee revenue on our consolidated statements of income. Cost reimbursements we receive from these entities in connection with our operating services are included as reductions to costs and expenses on our consolidated statements of income and totaled $1.0 million and $1.4 million during the three months ended June 30, 2016 and 2017, respectively, and $1.5 million and $2.4 million during the six months ended June 30, 2016 and 2017, respectively.


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



We recorded the following revenue from certain of these non-controlled entities in our consolidated statements of income (in millions):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2017
 
2016
 
2017
Transportation and terminals revenue:
 
 
 
 
 
 
 
 
BridgeTex, capacity lease
 
$
8.8

 
$
9.0

 
$
17.7

 
$
17.9

Double Eagle, throughput revenue
 
$
0.9

 
$
1.0

 
$
1.6

 
$
1.8

Saddlehorn, storage revenue
 
$
—

 
$
0.6

 
$
—

 
$
1.1


Our consolidated balance sheets reflected the following balances related to our investments in non-controlled entities (in millions):
 
 
December 31, 2016
 
June 30, 2017
 
 
Trade Accounts Receivable
 
Other Accounts Receivable
 
Trade Accounts Receivable
 
Other Accounts Receivable
Double Eagle
 
$
0.3

 
$
—

 
$
0.4

 
$
—

Powder Springs
 
$
—

 
$
—

 
$
—

 
$
1.0

Saddlehorn
 
$
—

 
$
0.1

 
$
—

 
$
0.1

BridgeTex
 
$
—

 
$
—

 
$
—

 
$
0.1


In addition to the transactions noted above, we incurred charges of $3.9 million for transportation of crude oil at published spot tariff rates on the BridgeTex pipeline during the three months ended June 30, 2017. We recorded these charges as cost of product sales in our consolidated statements of income.  We recognized an affiliate payable to BridgeTex on our consolidated balance sheets as of June 30, 2017 in the amount of $1.9 million in connection with this activity.

In January 2017, we entered into an agreement to guarantee our 50% pro rata share, up to $50.0 million, of obligations under Powder Springs’ credit facility. At June 30, 2017, we recognized a $0.8 million other current liability and a corresponding increase in our investment in non-controlled entities on our consolidated balance sheet to reflect the fair value of this guarantee.

In February 2016, we transferred a 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, which we recorded at that time as a $43.7 million intangible asset and an $8.3 million other receivable on our consolidated balance sheets. The intangible asset will be amortized over the 20-year life of the contracts received. We recognized a $28.1 million non-cash gain in 2016 in relation to this transaction.

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 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):
 
 
 
Investments at December 31, 2016
 
$
931,255

Additional investment
 
56,085

Earnings of non-controlled entities:
 
 
Proportionate share of earnings
 
48,196

Amortization of excess investment and capitalized interest
 
(1,174
)
Earnings of non-controlled entities
 
47,022

Less:
 
 
Distributions of earnings from investments in non-controlled entities
 
46,754

Distributions in excess of earnings of non-controlled entities
 
11,152

Investments at June 30, 2017
 
$
976,456

 
 
 


5.
Inventory

Inventory at December 31, 2016 and June 30, 2017 was as follows (in thousands): 
 
December 31, 2016
 
June 30,
2017
Refined products
$
54,285

 
$
20,449

Transmix
28,319

 
35,415

Liquefied petroleum gases
24,868

 
43,442

Crude oil
20,839

 
13,566

Additives
6,067

 
6,579

Total inventory
$
134,378

 
$
119,451



6.
Employee Benefit Plans

We sponsor a defined contribution plan in which we match our employees' qualifying contributions, resulting in additional expense to us. Expenses related to the defined contribution plan were $2.4 million and $2.1 million for the three months ended June 30, 2016 and 2017, respectively, and $5.4 million and $5.4 million for the six months ended June 30, 2016 and 2017, respectively.

Additionally, we sponsor two union pension plans that cover certain union employees and a pension plan for all non-union employees, and a postretirement benefit plan for selected employees. Net periodic benefit expense for the three and six months ended June 30, 2016 and 2017 was as follows (in thousands):
 
 
Three Months Ended
 
Three Months Ended
 
June 30, 2016
 
June 30, 2017
 
Pension
Benefits
 
Other  Postretirement
Benefits
 
Pension
Benefits
 
Other  Postretirement
Benefits
Components of net periodic benefit costs:
 
 
 
 
 
 
 
Service cost
$
4,405

 
$
62

 
$
5,230

 
$
66

Interest cost(1)
1,933

 
110

 
2,582

 
123

Expected return on plan assets(1)
(2,331
)
 
—

 
(2,646
)
 
—

Amortization of prior service credit(1)
(45
)
 
(929
)
 
(46
)
 
—

Amortization of actuarial loss(1)
1,107

 
185

 
1,783

 
200

Settlement cost(1)
—

 
—

 
361

 
—

Net periodic benefit cost (credit)
$
5,069

 
$
(572
)
 
$
7,264

 
$
389


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



  
 
Six Months Ended
 
Six Months Ended
 
June 30, 2016
 
June 30, 2017
 
Pension
Benefits
 
Other  Postretirement
Benefits
 
Pension
Benefits
 
Other  Postretirement
Benefits
Components of net periodic benefit costs:
 
 
 
 
 
 
 
Service cost
$
9,093

 
$
123

 
$
10,248

 
$
131

Interest cost(1)
3,978

 
220

 
4,932

 
245

Expected return on plan assets(1)
(4,459
)
 
—

 
(5,133
)
 
—

Amortization of prior service credit(1)
(90
)
 
(1,857
)
 
(91
)
 
—

Amortization of actuarial loss(1)
2,324

 
369

 
2,811

 
400

Settlement cost(1)
—

 
—

 
1,726

 
—

Net periodic benefit cost (credit)
$
10,846

 
$
(1,145
)
 
$
14,493

 
$
776

 
 
 
 
 
 
 
 

(1) Upon adoption of ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, these components of net periodic benefit cost (credit) are reported on the consolidated statements of income as other expense (income). See Note 1 – Organization, Description of Business and Basis of Presentation - New Accounting Pronouncements for further details about this accounting change.

The changes in AOCL related to employee benefit plan assets and benefit obligations for the three and six months ended June 30, 2016 and 2017 were as follows (in thousands):
 
 
Three Months Ended
 
Three Months Ended
 
 
June 30, 2016
 
June 30, 2017
Gains (Losses) Included in AOCL
 
Pension Benefits
 
Other Postretirement Benefits
 
Pension Benefits
 
Other Postretirement Benefits
Beginning balance
 
$
(61,107
)
 
$
(4,689
)
 
$
(56,236
)
 
$
(7,681
)
Amortization of prior service credit
 
(45
)
 
(929
)
 
(46
)
 
—

Amortization of actuarial loss
 
1,107

 
185

 
1,783

 
200

Settlement cost
 
—

 
—

 
361

 
—

Ending balance
 
$
(60,045
)
 
$
(5,433
)
 
$
(54,138
)
 
$
(7,481
)
 
 
Six Months Ended
 
Six Months Ended
 
 
June 30, 2016
 
June 30, 2017
Gains (Losses) Included in AOCL
 
Pension Benefits
 
Other Postretirement Benefits
 
Pension Benefits
 
Other Postretirement Benefits
Beginning balance
 
$
(62,279
)
 
$
(3,945
)
 
$
(58,584
)
 
$
(7,881
)
Amortization of prior service credit
 
(90
)
 
(1,857
)
 
(91
)
 
—

Amortization of actuarial loss
 
2,324

 
369

 
2,811

 
400

Settlement cost
 
—

 
—

 
1,726

 
—

Ending balance
 
$
(60,045
)
 
$
(5,433
)
 
$
(54,138
)
 
$
(7,481
)
 
 
 
 
 
 
 
 
 

Contributions estimated to be paid into the plans in 2017 are $26.5 million and $0.3 million for the pension and other postretirement benefit plans, respectively.



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



7.
Debt
Long-term debt at December 31, 2016 and June 30, 2017 was as follows (in thousands):
 
 
December 31,
2016
 
June 30,
2017
Commercial paper
 
$
50,000

 
$
197,000

6.40% Notes due 2018
 
250,000

 
250,000

6.55% Notes due 2019
 
550,000

 
550,000

4.25% Notes due 2021
 
550,000

 
550,000

3.20% Notes due 2025
 
250,000

 
250,000

5.00% Notes due 2026
 
650,000

 
650,000

6.40% Notes due 2037
 
250,000

 
250,000

4.20% Notes due 2042
 
250,000

 
250,000

5.15% Notes due 2043
 
550,000

 
550,000

4.20% Notes due 2045
 
250,000

 
250,000

4.25% Notes due 2046
 
500,000

 
500,000

Face value of long-term debt
 
4,100,000

 
4,247,000

Unamortized debt issuance costs(1)
 
(26,948
)
 
(25,677
)
Net unamortized debt premium(1)
 
6,530

 
4,910

Net unamortized amount of gains from historical fair value hedges(1)
 
7,610

 
5,679

Long-term debt, net
 
$
4,087,192

 
$
4,231,912

 
 
 
 
 

(1) Debt issuance costs, note discounts and premiums and realized gains and losses of historical fair value hedges are being amortized or accreted to the applicable notes over the respective lives of those notes.


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

Revolving Credit Facilities. At June 30, 2017, 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 June 30, 2017. Borrowings under this facility may be used for general partnership purposes, including capital expenditures. As of both December 31, 2016 and June 30, 2017, 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 June 30, 2017, the total borrowing capacity under our 364-day credit facility was $250.0 million. The maturity date of this credit facility is October 19, 2017. Any borrowings under this 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 June 30, 2017. Borrowings under this facility may be used for general partnership purposes, including capital expenditures. As of both December 31, 2016 and June 30, 2017, there were no borrowings outstanding under this facility.

Commercial Paper Program. We have a commercial paper program under which we may issue commercial paper notes in an amount up to the available capacity under our $1.0 billion revolving credit facility. The maturities

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



of the commercial paper notes vary, but may not exceed 397 days from the date of issuance. Because the commercial paper we can issue is limited to amounts available under our revolving credit facility, amounts outstanding under the program are classified as long-term debt. 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 weighted-average interest rate for commercial paper borrowings based on the number of days outstanding was 0.8% for the year ended December 31, 2016 and 1.2% for the six months ended June 30, 2017.


8.
Derivative Financial Instruments

Interest Rate Derivatives

We periodically enter into interest rate derivatives to hedge the fair value of debt or hedge against variability in interest rates, and we have historically designated these derivatives as fair value or cash flow hedges for accounting purposes. Adjustments resulting from discontinued hedges continue to be recognized in accordance with their historic hedging relationships.

We have 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 June 30, 2017 were recorded on our balance sheets as other current assets of $12.6 million, with the offset recorded to other comprehensive income. We account for these agreements as cash flow hedges.

Commodity Derivatives

Hedging Strategies

Our butane blending activities produce gasoline, and we can reasonably estimate the timing and quantities of sales of these products. We use a combination of exchange-based commodities futures contracts and forward purchase and sale contracts to help manage commodity price changes and mitigate the risk of decline in the product margin realized from our butane blending activities. Further, certain of our other commercial operations generate petroleum products, and we also use futures contracts to hedge against price changes for some of these commodities.

Forward physical purchase and sale contracts that qualify for and are elected as normal purchases and sales are accounted for using traditional accrual accounting.


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



The futures 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 six months ended June 30, 2016 and 2017, none of the commodity hedging contracts we entered into qualified for or were designated as cash flow hedges.

We use futures contracts designated as economic hedges for accounting purposes to hedge against changes in the price of refined products and crude oil that we expect to sell in the future. Period changes in the fair value of these agreements are recognized currently in earnings as adjustments to product sales revenue.

We also use futures contracts designated as economic 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.

Additionally, we hold certain crude oil tank bottoms which we classify as long-term assets and include with other noncurrent assets on our consolidated balance sheets. We use futures contracts to hedge against changes in the fair value of these assets. We record the effective portion of the gains or losses for those contracts that qualify as fair value hedges as adjustments to the asset 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 futures contracts at June 30, 2017 were as follows:
Type of Contract/Accounting Methodology
 
Product Represented by the Contract and Associated Barrels
 
Maturity Dates
Futures - Fair Value Hedges
 
0.7 million barrels of crude oil
 
November 2017
Futures - Economic Hedges
 
4.6 million barrels of refined products and crude oil
 
Between July 2017 and April 2018
Futures - Economic Hedges
 
1.4 million barrels of butane
 
Between September 2017 and April 2018


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



Energy Commodity Derivatives Contracts and Deposits Offsets

At December 31, 2016, we had made margin deposits of $49.9 million for our future contracts with our counterparties, which were recorded as current assets under energy commodity derivatives deposits on our consolidated balance sheets. At June 30, 2017, we had made margin deposits of $4.5 million for our future contracts with one of our counterparties, which were recorded as current assets under energy commodity derivatives deposits on our consolidated balance sheets. Additionally at June 30, 2017, we had received margin deposits of $0.1 million for our future contracts with a second counterparty, which were recorded as current liabilities under energy commodity derivatives deposits on our consolidated balance sheets.We have the right to offset the combined fair values of our open futures 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 futures contracts separately from the related margin deposits on our consolidated balance sheets. Additionally, we have the right to offset the fair values of our futures contracts 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, 2016 and June 30, 2017 (in thousands):
 
 
December 31, 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
 
Margin Deposit Amounts Not Offset in the Consolidated Balance Sheets
 
Net Asset Amount(1)
Energy commodity derivatives
 
$
(36,798
)
 
$
6,060

 
$
(30,738
)
 
$
49,899

 
$
19,161

 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2017
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
 
Margin Deposit Amounts Not Offset in the Consolidated Balance Sheets
 
Net Asset Amount(1)
Energy commodity derivatives
 
$
8,058

 
$
(3,808
)
 
$
4,250

 
$
4,373

 
$
8,623

 
 
 
 
 
 
 
 
 
 
 
(1)
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 six months ended June 30, 2016 and 2017 were as follows (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Derivative Losses Included in AOCL
2016
 
2017
 
2016
 
2017
Beginning balance
$
(42,216
)
 
$
(32,741
)
 
$
(30,126
)
 
$
(34,776
)
Net gain (loss) on cash flow hedges
(8,631
)
 
(2,802
)
 
(21,109
)
 
(1,507
)
Reclassification of net loss on cash flow hedges to income
388

 
739

 
776

 
1,479

Ending balance
$
(50,459
)
 
$
(34,804
)
 
$
(50,459
)
 
$
(34,804
)

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



Income Statements
The following tables provide a summary of the effect on our consolidated statements of income for the three and six months ended June 30, 2016 and 2017 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, 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
 
 
$
(8,631
)
 
 
Interest expense
 
 
$
(388
)
 
 
 
$
—

 
 
 
Three Months Ended June 30, 2017
 
 
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
 
 
$
(2,802
)
 
 
Interest expense
 
 
$
(739
)
 
 
 
$
—

 
 
 
Six Months Ended June 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
 
 
$
(21,109
)
 
 
Interest expense
 
 
$
(776
)
 
 
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
 
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
 
 
$
(1,507
)
 
 
Interest expense
 
 
$
(1,479
)
 
 
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

As of June 30, 2017, the net loss estimated to be classified to interest expense over the next twelve months from AOCL is approximately $3.0 million.

We use futures contracts designated as fair value hedges under ASC 815-25, Derivatives and Hedging–Fair Value Hedges, to hedge against changes in the fair value of 0.7 million barrels of crude oil that are contractually reserved as tank bottoms and included with other noncurrent assets on our consolidated balance sheets. The effective portions of the fair value gains or losses on these futures contracts were offset by fair value gains or losses on the tank bottoms. There was no ineffectiveness recognized on these hedges. The cash flows from settled contracts were recorded in operating activities in our consolidated statements of cash flows. The gains (losses) on these futures contracts and the underlying tank bottoms were as follows (in millions):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2017
 
2016
 
2017
Gain (loss) recognized in other income/expense on derivatives (futures contracts)
 
(7.7
)
 
3.4

 
(6.2
)
 
6.8

Loss (gain) recognized in other income/expense on hedged item (tank bottoms)
 
7.7

 
(3.4
)
 
6.2

 
(6.8
)
 
 
 
 
 
 
 
 
 


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



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 June 30, 2016 and 2017, we recognized a gain of $1.9 million and $0.3 million, respectively, and for the six months ended June 30, 2016 and 2017, we recognized a gain of $4.2 million and $1.7 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 six months ended June 30, 2016 and 2017 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
 
Six Months Ended
 
 
Location of Gain (Loss)
Recognized on Derivatives
 
June 30,
 
June 30,
Derivative Instrument
 
 
2016
 
2017
 
2016
 
2017
Futures contracts
 
Product sales revenue
 
$
(11,770
)
 
$
14,214

 
$
4,212

 
$
42,894

Futures contracts
 
Operating expenses
 
(8,003
)
 
—

 
(5,404
)
 
—

Futures contracts
 
Cost of product sales
 
3,240

 
(1,184
)
 
2,812

 
53

 
 
Total
 
$
(16,533
)
 
$
13,030

 
$
1,620

 
$
42,947

The impact of the derivatives in the above table was reflected as cash from operations on our consolidated statements of cash flows.
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, 2016 and June 30, 2017 (in thousands):
 
 
December 31, 2016
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Futures contracts
 
Energy commodity derivatives contracts, net
 
$
—

 
Energy commodity derivatives contracts, net
 
$
3,079

Interest rate contracts
 
Other noncurrent assets
 
14,114

 
Other noncurrent liabilities
 
—

 
 
Total
 
$
14,114

 
Total
 
$
3,079

 
 
 
June 30, 2017
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Futures contracts
 
Energy commodity derivatives contracts, net
 
$
3,738

 
Energy commodity derivatives contracts, net
 
$
—

Interest rate contracts
 
Other current assets
 
12,607

 
Other current liabilities
 
—

 
 
Total
 
$
16,345

 
Total
 
$
—

 

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



The following tables provide a summary of the fair value of derivatives accounted for under ASC 815, Derivatives and Hedging, which are presented on a net basis in our consolidated balance sheets, that were not designated as hedging instruments as of December 31, 2016 and June 30, 2017 (in thousands):
 
 
December 31, 2016
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Futures contracts
 
Energy commodity derivatives contracts, net
 
$
6,060

 
Energy commodity derivatives contracts, net
 
$
33,719

 
 
 
 
 
 
 
 
 
 
 
June 30, 2017
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Futures contracts
 
Energy commodity derivatives contracts, net
 
$
4,320

 
Energy commodity derivatives contracts, net
 
$
3,808

 

9.
Commitments and Contingencies

Environmental Liabilities

Liabilities recognized for estimated environmental costs were $24.0 million and $18.9 million at December 31, 2016 and June 30, 2017, respectively. We have classified environmental liabilities as current or noncurrent based on management’s estimates regarding the timing of actual payments. Environmental expenses 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 $0.8 million and $0.2 million for the three months ended June 30, 2016 and 2017, respectively, and $4.3 million and $4.5 million for the six months ended June 30, 2016 and 2017, respectively.

Environmental Receivables

Receivables from insurance carriers and other third parties related to environmental matters were $4.1 million at December 31, 2016, of which $0.6 million and $3.5 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 $3.9 million at June 30, 2017, of which $0.5 million and $3.4 million were recorded to other accounts receivable and long-term receivables, respectively, on our consolidated balance sheets.

Other

See Note 4 – Investments in Non-Controlled Entities for detail of our guarantee on behalf of Powder Springs.

We are a party to various other claims, legal actions and complaints arising in the ordinary course of business. While the results cannot be predicted with certainty, management believes the ultimate resolution of these claims, legal actions and complaints after consideration of amounts accrued, insurance coverage or other indemnification arrangements will not have a material adverse effect on our results of operations, financial position or cash flows.



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



10.
Long-Term Incentive Plan
We have a long-term incentive plan (“LTIP”) for certain of our employees and 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 June 30, 2017 total 2.6 million.
 
Our equity-based incentive compensation expense was as follows (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2017
 
2016
 
2017
Performance-based awards:
 
 
 
 
 
 
 
 
2014 awards
 
$
979

 
$
—

 
$
4,388

 
$
28

2015 awards
 
926

 
2,066

 
2,471

 
3,224

2016 awards
 
1,023

 
2,592

 
2,143

 
3,641

2017 awards
 
—

 
1,252

 
—

 
2,498

Time-based awards
 
481

 
660

 
1,057

 
1,326

Total
 
$
3,409

 
$
6,570

 
$
10,059

 
$
10,717

 
 
 
 
 
 
 
 
 
Allocation of LTIP expense on our consolidated statements of income:
 
 
 
 
G&A expense
 
$
3,378

 
$
6,514

 
$
9,986

 
$
10,632

Operating expense
 
31

 
56

 
73

 
85

Total
 
$
3,409

 
$
6,570

 
$
10,059

 
$
10,717


On February 2, 2017, 207,445 phantom unit awards were issued pursuant to our LTIP. These grants included both performance-based and time-based phantom unit awards and have a three-year vesting period that will end on December 31, 2019.

Basic and Diluted Net Income Per Limited Partner Unit

The difference between our actual limited partner units outstanding and our weighted-average number of limited partner units outstanding used to calculate basic net income per unit is due to the impact of: (i) the phantom units issued to non-employee directors and (ii) the weighted average effect of units actually issued during a period.  The difference between the weighted-average number of limited partner units outstanding used for basic and diluted net income per unit calculations on our consolidated statements of income is primarily the dilutive effect of phantom unit grants associated with our LTIP that have not yet vested.



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



11.
Partners’ Capital and Distributions

Partners’ Capital

In May 2017, we filed a prospectus supplement to the shelf registration statement for our continuous equity offering program (which we refer to as an at-the-market program, or “ATM”) pursuant to which we may issue up to $750.0 million of common units in amounts, at prices and on terms to be determined by market conditions at the time. The net proceeds from any sales under the ATM, after deducting the sales agents’ commissions and our offering expenses, will be used for general partnership purposes, including repayment of indebtedness or capital expenditures. No units were issued pursuant to this program during the current period.

The following table details the changes in the number of our limited partner units outstanding from January 1, 2017 through June 30, 2017:

Limited partner units outstanding on January 1, 2017
 
227,783,916

January 2017–Settlement of 2014 awards(a)
 
216,679

During 2017–Other(b)
 
23,961

Limited partner units outstanding on June 30, 2017
 
228,024,556

 
 
 
(a) Limited partner units issued to settle long-term incentive plan awards to certain employees that vested on December 31, 2016.
(b) Limited partner units issued to settle the equity-based retainers paid to certain independent directors of our general partner and the final payment of deferred director compensation to a former director.

Distributions

Distributions we paid during 2016 and 2017 were as follows (in thousands, except per unit amounts):
 
Payment Date
 
Per Unit Cash
Distribution
Amount
 
Total Cash Distribution to Limited Partners
02/12/2016
 
 
$
0.7850

 
 
 
$
178,808

 
05/13/2016
 
 
0.8025

 
 
 
182,797

 
Through 06/30/2016
 
 
1.5875

 
 
 
361,605

 
08/12/2016
 
 
0.8200

 
 
 
186,783

 
11/14/2016
 
 
0.8375

 
 
 
190,769

 
Total
 
 
$
3.2450

 
 
 
$
739,157