Edgar Filing: MAGELLAN MIDSTREAM PARTNERS LP

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, 2018



£	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 every Interactive Data File required to be submitted 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 £

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 October 31, 2018, there were 228,195,160 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

PART I

FINANCIAL INFORMATION



ITEM 1.		CONSOLIDATED FINANCIAL STATEMENTS
	CONSOLIDATED STATEMENTS OF INCOME		2
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME		3
	CONSOLIDATED BALANCE SHEETS		4
	CONSOLIDATED STATEMENTS OF CASH FLOWS		5
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
	1.	Organization, Description of Business and Basis of Presentation	6
	2.	Revenue from Contracts with Customers	10
	3.	Segment Disclosures	14
	4.	Investments in Non-Controlled Entities	17
	5.	Inventory	19
	6.	Employee Benefit Plans	19
	7.	Debt	21
	8.	Derivative Financial Instruments	22
	9.	Commitments and Contingencies	26
	10.	Long-Term Incentive Plan	27
	11.	Partners’ Capital and Distributions	29
	12.	Fair Value	30
	13.	Related Party Transactions	31
	14.	Subsequent Events	31
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Introduction		32
	Growth Projects and Recent Developments		32
	Results of Operations		33
	Distributable Cash Flow		39
	Liquidity and Capital Resources		40
	Off-Balance Sheet Arrangements		41
	Environmental		42
	Other Items		43
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	45
ITEM 4.		CONTROLS AND PROCEDURES	46
Forward-Looking Statements			47
PART II OTHER INFORMATION
ITEM 1.		LEGAL PROCEEDINGS	49
ITEM 1A.		RISK FACTORS	50
ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	50
ITEM 3.		DEFAULTS UPON SENIOR SECURITIES	50
ITEM 4.		MINE SAFETY DISCLOSURES	50
ITEM 5.		OTHER INFORMATION	50
ITEM 6.		EXHIBITS	50
Index to Exhibits			51
Signatures			52

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,
	2017			2018			2017			2018
Transportation and terminals revenue	$	446,935		$	488,775		$	1,272,845		$	1,392,960
Product sales revenue	121,010			144,403			548,634			552,792
Affiliate management fee revenue	4,903			4,842			12,883			15,138
Total revenue	572,848			638,020			1,834,362			1,960,890
Costs and expenses:
Operating	165,368			172,115			442,254			475,256
Cost of product sales	121,819			120,510			440,670			473,781
Depreciation and amortization	49,909			56,228			146,103			161,726
General and administrative	37,202			47,389			120,876			147,235
Total costs and expenses	374,298			396,242			1,149,903			1,257,998
Earnings of non-controlled entities	31,151			53,795			78,173			130,843
Operating profit	229,701			295,573			762,632			833,735
Interest expense	51,895			55,133			154,653			168,535
Interest capitalized	(3,424		)	(3,099		)	(10,804		)	(13,354		)
Interest income	(240		)	(501		)	(788		)	(1,460		)
Gain on sale of asset	(18,505		)	(353,797		)	(18,505		)	(353,797		)
Other expense	549			1,694			3,762			10,299
Income before provision for income taxes	199,426			596,143			634,314			1,023,512
Provision for income taxes	926			1,609			2,678			3,659
Net income	$	198,500		$	594,534		$	631,636		$	1,019,853
Basic net income per limited partner unit	$	0.87		$	2.60		$	2.77		$	4.47
Diluted net income per limited partner unit	$	0.87		$	2.60		$	2.77		$	4.46
Weighted average number of limited partner units outstanding used for basic net income per unit calculation	228,199			228,397			228,167			228,368
Weighted average number of limited partner units outstanding used for diluted net income per unit calculation	228,260			228,449			228,222			228,412

See notes to consolidated financial statements.

MAGELLAN MIDSTREAM PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, in thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2018			2017			2018
Net income	$	198,500		$	594,534		$	631,636		$	1,019,853
Other comprehensive income:
Derivative activity:
Net gain (loss) on cash flow hedges	(228		)	6,852			(1,735		)	13,963
Reclassification of net loss on cash flow hedges to income	740			740			2,219			2,219
Changes in employee benefit plan assets and benefit obligations recognized in other comprehensive income:
Net actuarial loss	—			—			—			(5,291		)
Amortization of prior service credit	(45		)	(45		)	(136		)	(136		)
Amortization of actuarial loss	1,568			1,806			4,779			8,623
Settlement cost	289			—			2,015			—
Total other comprehensive income	2,324			9,353			7,142			19,378
Comprehensive income	$	200,824		$	603,887		$	638,778		$	1,039,231

See notes to consolidated financial statements.

MAGELLAN MIDSTREAM PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS

(In thousands)



	December 31, 2017			September 30, 2018
ASSETS				(Unaudited)
Current assets:
Cash and cash equivalents	$	160,840		$	217,423
Trade accounts receivable	138,779			137,618
Other accounts receivable	14,561			24,025
Inventory	182,345			179,366
Energy commodity derivatives deposits	36,690			47,354
Other current assets	63,396			66,221
Total current assets	596,611			672,007
Property, plant and equipment	7,235,468			7,570,759
Less: accumulated depreciation	1,682,633			1,835,824
Net property, plant and equipment	5,552,835			5,734,935
Investments in non-controlled entities	1,082,511			1,005,392
Long-term receivables	27,676			23,520
Goodwill	53,260			53,260
Other intangibles (less accumulated amortization of $1,389 and $2,493 at December 31, 2017 and September 30, 2018, respectively)	52,764			51,660
Restricted cash	15,228			42,807
Other noncurrent assets	13,490			12,087
Total assets	$	7,394,375		$	7,595,668

LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable	$	104,852		$	137,169
Accrued payroll and benefits	56,261			53,285
Accrued interest payable	70,657			49,309
Accrued taxes other than income	51,343			52,307
Environmental liabilities	6,235			10,537
Deferred revenue	117,795			121,247
Accrued product liabilities	96,159			80,195
Energy commodity derivatives contracts, net	25,694			32,244
Current portion of long-term debt, net	250,974			552,898
Other current liabilities	56,540			37,873
Total current liabilities	836,510			1,127,064
Long-term debt, net	4,273,518			3,718,607
Long-term pension and benefits	111,305			125,088
Other noncurrent liabilities	30,350			64,425
Environmental liabilities	13,039			13,064
Commitments and contingencies
Partners’ capital:
Limited partner unitholders (228,025 units and 228,195 units outstanding at December 31, 2017 and September 30, 2018, respectively)	2,267,231			2,665,620
Accumulated other comprehensive loss	(137,578		)	(118,200		)
Total partners’ capital	2,129,653			2,547,420
Total liabilities and partners’ capital	$	7,394,375		$	7,595,668

See notes to consolidated financial statements.

MAGELLAN MIDSTREAM PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)



	Nine Months Ended
	September 30,
	2017			2018
Operating Activities:
Net income	$	631,636		$	1,019,853
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense	146,103			161,726
Gain on sale and retirement of assets	(10,924		)	(347,541		)
Earnings of non-controlled entities	(78,173		)	(130,843		)
Distributions from operations of non-controlled entities	97,691			147,950
Equity-based incentive compensation expense	14,183			24,612
Settlement cost, amortization of prior service credit and actuarial loss	6,658			8,487
Changes in operating assets and liabilities:
Trade accounts receivable and other accounts receivable	(14,413		)	(8,303		)
Inventory	(34,384		)	2,979
Energy commodity derivatives contracts, net of derivatives deposits	1,135			(4,505		)
Accounts payable	15,576			27,498
Accrued payroll and benefits	(5,608		)	(2,976		)
Accrued interest payable	(23,386		)	(21,348		)
Accrued taxes other than income	(322		)	964
Accrued product liabilities	67,972			(15,964		)
Deferred revenue	14,806			5,353
Current and noncurrent environmental liabilities	(3,352		)	4,327
Other current and noncurrent assets and liabilities	(11,497		)	(8,488		)
Net cash provided by operating activities	813,701			863,781
Investing Activities:
Additions to property, plant and equipment, net⁽¹⁾	(418,239		)	(374,320		)
Proceeds from sale and disposition of assets	44,303			579,448
Investments in non-controlled entities	(114,078		)	(147,048		)
Distributions from returns of investments in non-controlled entities	52,738			1,786
Deposits received from undivided joint interest third party	—			41,571
Net cash provided (used) by investing activities	(435,276		)	101,437
Financing Activities:
Distributions paid	(596,854		)	(642,370		)
Net commercial paper borrowings	218,984			—
Payments on notes	—			(250,000		)
Debt placement costs	—			(326		)
Net receipt on financial derivatives	—			20,925
Payments associated with settlement of equity-based incentive compensation	(13,875		)	(9,285		)
Net cash used by financing activities	(391,745		)	(881,056		)
Change in cash, cash equivalents and restricted cash	(13,320		)	84,162
Cash, cash equivalents and restricted cash at beginning of period	14,701			176,068
Cash, cash equivalents and restricted cash at end of period	$	1,381		$	260,230

Supplemental non-cash investing and financing activities:
Contribution of property, plant and equipment to a non-controlled entity	$	93,051		$	—
Issuance of limited partner units in settlement of equity-based incentive plan awards	$	1,669		$	120

⁽¹⁾ Additions to property, plant and equipment	$	(443,439	)	$	(375,599	)
Changes in accounts payable and other current liabilities related to capital expenditures	25,200			1,279
Additions to property, plant and equipment, net	$	(418,239	)	$	(374,320	)

See notes to consolidated financial statements.

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 September 30, 2018, 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 33 million barrels, of which approximately 21 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, aviation fuel, kerosene 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 typically blended with other refined products as required by government mandates; and


•	ammonia is primarily used as a nitrogen fertilizer.

MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Except for ammonia, we use the term petroleum products to describe any, or a combination, of the above-noted products.

Basis of Presentation

In the opinion of management, our accompanying consolidated financial statements which are unaudited, except for the consolidated balance sheet as of December 31, 2017, 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, 2018, the results of operations for the three and nine months ended September 30, 2017 and 2018 and cash flows for the nine months ended September 30, 2017 and 2018. The results of operations for the nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year ending December 31, 2018 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 refined products pipeline system, 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, 2017.

Reclassifications. Prior year amounts related to restricted cash have been reclassified to conform with the current period’s presentation.

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.

Restricted Cash

Restricted cash includes cash held by us, which is contractually required to be used for the construction of fixed assets, and is unavailable for general use. It is classified as noncurrent due to its designation to be used for the construction of noncurrent assets.

Correction of Actuarial Valuation Error

In first quarter 2018, an error was discovered in our third-party actuary’s valuation of our pension liabilities and net periodic pension expenses dating back to 2010. The impacts of the error were not material to any of our prior period financial statements and the cumulative impact was corrected with a one-time adjustment in the first quarter of 2018. As a result, during first quarter 2018, net periodic pension expenses were increased by $16.0 million ($5.7 million operating expense, $3.4 million general and administrative (“G&A”) costs and $6.9 million other expense below operating profit on our consolidated statements of income). In addition, long-term pension and benefits was increased $18.8 million and accumulated other comprehensive loss was increased by $2.8 million on our consolidated balance sheets.

MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

New Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. For public companies, this ASU is effective for fiscal years that start after December 15, 2018, and early adoption is permitted. This standard will not have a material impact on our consolidated statements of income. Based on our current population of leases, we expect the impact of this ASU to increase our assets and liabilities by approximately $80.0 million due to the recognition of right of use assets and lease liabilities.

New Accounting Pronouncements - Adopted January 1, 2018

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This update changes GAAP’s hedge accounting requirements to simplify some of the specialized treatment’s most complex areas. These simplifications are intended to expand opportunities to use hedge accounting and better align the accounting treatment with existing risk management activities. The ASU is effective for public companies starting after December 15, 2018, and we early-adopted the new standard on January 1, 2018. The adoption of this ASU did not have a material impact on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments: A Consensus of the FASB Emerging Issues Task Force. This ASU includes a requirement to make an accounting policy election to classify distributions received from equity method investees under either (1) the cumulative earnings approach, where distributions in excess of equity earnings are considered a return of capital and classified as cash inflows from investing activities, or (2) the nature of the distribution approach, where each distribution is evaluated on the basis of the source of the payment and classified as either operating or investing cash inflows. We adopted this standard on January 1, 2018 using the retrospective transition method and made an accounting policy election to use the nature of the distribution approach, which resulted in the following adjustments to our September 30, 2017 comparative statement of cash flows (in thousands):



	Nine Months Ended September 30, 2017, as Reported			ASU 2016-15 Adjustment			Nine Months Ended September 30, 2017, as Adjusted
Operating activities:
Distributions from operations of non-controlled entities	$	78,562		$	19,129		$	97,691
Net cash provided by operating activities	$	794,572		$	19,129		$	813,701

Investing activities:
Distributions from returns of investments in non-controlled entities	$	71,867		$	(19,129	)	$	52,738
Net cash used by investing activities	$	(416,147	)	$	(19,129	)	$	(435,276	)

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). 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. On January 1, 2018, we adopted the new Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers and all related

MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

amendments using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of partners’ capital. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet resulting from the adoption of the new revenue standard was as follows (in thousands):



	Balance at December 31, 2017			Adjustments Due to ASU 2014-09			Balance at January 1, 2018
Assets:
Property, plant and equipment	$	7,235,468		$	8,516		$	7,243,984
Accumulated depreciation	(1,682,633		)	(325		)	(1,682,958		)
Net property, plant and equipment	$	5,552,835		$	8,191		$	5,561,026
Investments in non-controlled entities	$	1,082,511		$	502		$	1,083,013

Liabilities:
Deferred revenue	$	117,795		$	(1,901	)	$	115,894
Other noncurrent liabilities	$	30,350		$	4,619		$	34,969

Partners’ capital:
Limited partner unitholders	$	2,267,231		$	5,975		$	2,273,206

The primary changes impacting our financial statements under the new revenue standard include the requirement for us to estimate deficiencies in our customers’ use of our services contracted as minimum commitments and adjust the amount of revenue recognized in proportion to our customers’ pattern of exercised rights. This change results in accelerating the timing of revenue recognized for specific contracts for which we estimate our customers will not ship their minimum commitments. In addition, we periodically receive payments from customers seeking to expand their access to our pipeline systems and terminals. Prior to the adoption of the new revenue standard, these payments were recorded as reductions to our property, plant and equipment (“PP&E”) expenditures. Under the new revenue standard, these payments are recorded to deferred revenue and other noncurrent liabilities and are recognized as revenue in proportion to the related services provided. The impact of this change increases our revenues, contract liabilities, PP&E and depreciation expense. We expect the impact of the adoption of the new revenue standard, including these changes, to be immaterial to our net income on an ongoing basis.

MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


2.	Revenue from Contracts with Customers

Adoption of ASC 606, Revenue from Contracts with Customers

The table below provides the amount by which financial statement line items are affected in the current reporting period by the application of the new revenue standard, as compared with the guidance that was in effect before the change (in thousands):



	As Reported		Amounts without adoption of ASC 606		Effect of Change Higher/(Lower)
Statements of Income:
	Three Months Ended September 30, 2018
Transportation and terminals revenue	$	488,775	$	486,801	$	1,974
Depreciation and amortization	$	56,228	$	56,108	$	120

	Nine Months Ended September 30, 2018
Transportation and terminals revenue	$	1,392,960	$	1,383,404	$	9,556
Depreciation and amortization	$	161,726	$	161,486	$	240

Balance Sheet:
	As of September 30, 2018
Assets:
Property, plant and equipment	$	7,570,759	$	7,555,758	$	15,001
Accumulated depreciation	1,835,824		1,835,259		565
Net property, plant and equipment	$	5,734,935	$	5,720,499	$	14,436
Investments in non-controlled entities	$	1,005,392	$	1,004,890	$	502
Liabilities:
Deferred revenue	$	121,247	$	129,458	$	(8,211	)
Other noncurrent liabilities	$	64,425	$	56,567	$	7,858
Partners’ capital:
Limited partner unitholders	$	2,665,620	$	2,650,329	$	15,291

Revenue recognition policies

Revenue is recognized upon the satisfaction of each performance obligation required by our customer contracts. Transportation and terminals revenue is recognized over time as our customers receive the benefits of our service as it is performed on their behalf using an output method based on actual deliveries. Revenue for our storage services is recognized over time using an output method based on the capacity of storage under contract with our customers. Product sales revenue is recognized at a point in time when our customers take control of the commodities purchased. We record back-to-back purchases and sales of petroleum products where we are acting as an agent on a net basis.

We recognize pipeline transportation revenue for crude oil and ammonia shipments when our customers’ product arrives at the customer-designated destination. For shipments of refined products under published tariffs that combine transportation and terminalling services, we recognize revenue when our customers take delivery of their product from our system. For shipments where terminalling services are not included in the tariff, we recognize revenue when our customers’ product arrives at the customer-designated destination. We have certain contracts that

MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

require counterparties to ship a minimum volume over an agreed-upon time period, which are contracted as minimum dollar or volume commitments. Revenue pursuant to these take-or-pay contracts is recognized when the customers utilize their committed volumes. Additionally, when we estimate that the customers will not utilize all or a portion of their committed volumes, we recognize revenue in proportion to the pattern of exercised rights for the respective commitment period.

Our interstate common carrier petroleum products pipeline operations are subject to rate regulation by the Federal Energy Regulatory Commission (“FERC”) under the Interstate Commerce Act, the Energy Policy Act of 1992 and rules and orders promulgated pursuant thereto. FERC regulation requires that interstate pipeline rates be filed with the FERC, be posted publicly and be nondiscriminatory and “just and reasonable.” The rates on approximately 40% of the shipments on our refined products pipeline system are regulated by the FERC primarily through an index methodology. As an alternative to cost-of-service or index-based rates, interstate pipeline companies may establish rates by obtaining authority to charge market-based rates in competitive markets or by negotiation with unaffiliated shippers. Approximately 60% of our refined products pipeline system’s markets are either subject to regulations by the states in which we operate or are approved for market-based rates by the FERC, and in both cases these rates can generally be adjusted at our discretion based on market factors. Most of the tariffs on our crude oil pipelines are established by negotiated rates that generally provide for annual adjustments in line with changes in the FERC index, subject to certain modifications.

For both our index-based rates and our market-based rates, our published tariffs serve as contracts, and shippers nominate the volume to be shipped up to a month in advance. These tariffs include provisions which allow us to deduct from our customer’s inventory a small percentage of the products our customers transport on our pipeline systems. We refer to this non-monetary consideration as tender deduction revenue. We receive tender deductions from our customers as consideration for product losses during the transportation of petroleum products within our pipeline systems. Tender deduction revenue is generally recognized as transportation revenue when the customer's transported commodities reach their destination and is recorded at the fair value of the product received on the date received or the contract date, as applicable.

Product sales revenue pricing is contractually specified, and we have determined that each barrel sold represents a separate performance obligation. Transaction prices for our other services including terminalling, storage and ancillary services are typically contracted as a single performance obligation with our customers. In circumstances where multiple performance obligations are contractually required, we allocate the transaction price to the various performance obligations based on their relative standalone selling price.

MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Statement of Income Disclosures

The following tables provide details of our revenues disaggregated by key activities that comprise our performance obligations by operating segment (in thousands):



	Three Months Ended September 30, 2018
	Refined Products			Crude Oil			Marine Storage			Intersegment Eliminations			Total
Transportation	$	197,235		$	91,086		$	—		$	—		$	288,321
Terminalling	46,213			2,528			616			—			49,357
Storage	25,137			29,094			33,890			(923		)	87,198
Ancillary services	28,808			6,278			5,857			—			40,943
Lease revenue	2,641			16,132			4,183			—			22,956
Transportation and terminals revenue	300,034			145,118			44,546			(923		)	488,775
Product sales revenue	129,926			12,666			1,811			—			144,403
Affiliate management fee revenue	351			3,463			1,028			—			4,842
Total revenue	430,311			161,247			47,385			(923		)	638,020
Revenue not under the guidance of ASC 606:
Lease revenue⁽¹⁾	(2,641		)	(16,132		)	(4,183		)	—			(22,956		)
Losses from futures contracts included in product sales revenue⁽²⁾	24,253			102			—			—			24,355
Affiliate management fee revenue	(351		)	(3,463		)	(1,028		)	—			(4,842		)
Total revenue from contracts with customers under ASC 606	$	451,572		$	141,754		$	42,174		$	(923	)	$	634,577

⁽¹⁾Lease revenue is accounted for under ASC 840, Leases.

⁽²⁾ The impact on product sales revenue from futures contracts falls under the guidance of ASC 815, Derivatives and Hedging.

MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	Nine Months Ended September 30, 2018
	Refined Products			Crude Oil			Marine Storage			Intersegment Eliminations			Total
Transportation	$	548,733		$	254,964		$	—		$	—		$	803,697
Terminalling	136,135			2,528			1,920			—			140,583
Storage	75,353			87,620			101,420			(2,753		)	261,640
Ancillary services	83,055			19,512			18,928			—			121,495
Lease revenue	8,216			44,705			12,624			—			65,545
Transportation and terminals revenue	851,492			409,329			134,892			(2,753		)	1,392,960
Product sales revenue	513,634			32,387			6,771			—			552,792
Affiliate management fee revenue	1,000			11,328			2,810			—			15,138
Total revenue	1,366,126			453,044			144,473			(2,753		)	1,960,890
Revenue not under the guidance of ASC 606:
Lease revenue⁽¹⁾	(8,216		)	(44,705		)	(12,624		)	—			(65,545		)
Losses from futures contracts included in product sales revenue⁽²⁾	64,558			5,582			—			—			70,140
Affiliate management fee revenue	(1,000		)	(11,328		)	(2,810		)	—			(15,138		)
Total revenue from contracts with customers under ASC 606	$	1,421,468		$	402,593		$	129,039		$	(2,753	)	$	1,950,347

⁽¹⁾Lease revenue is accounted for under ASC 840, Leases.

⁽²⁾ The impact on product sales revenue from futures contracts falls under the guidance of ASC 815, Derivatives and Hedging.

Balance Sheet Disclosures

We invoice customers on our refined products pipelines for transportation services when their product enters our system. At each period end, we record all invoiced amounts associated with products that have not yet been delivered (in-transit products) as a contract liability. This liability is presented as deferred revenue on our consolidated balance sheets. Deferred revenue is also recorded for pre-payments received in conjunction with take-or-pay contracts, storage contracts and other service offerings in which the service to our customers remains unfulfilled. Additionally, at each period end, we defer the direct costs we have incurred associated with our customers’ in-transit products as contract assets. Contract assets are presented on our consolidated balance sheets as other current assets. These direct costs are estimated based on our per-barrel direct delivery cost for the current period multiplied by the total in-transit barrels in our system at the end of the period multiplied by 50% to reflect the average transportation costs incurred for all products across all of our pipeline systems. We use 50% of the in-transit barrels because that best represents the average delivery point of all barrels in our pipeline system. These contract assets and contract liabilities are determined using judgments and assumptions that management considers reasonable.

MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes our accounts receivable, contract assets and contract liabilities resulting from contracts with customers (in thousands):



	January 1, 2018		September 30, 2018
Accounts receivable from contracts with customers	$	133,084	$	135,269
Contract assets	$	8,615	$	8,053
Contract liabilities	$	106,933	$	119,841

For the three and nine months ended September 30, 2018, we recognized $10.7 million and $77.0 million, respectively, of transportation and terminals revenue that was recorded in deferred revenue as of January 1, 2018.

Unfulfilled Performance Obligations

We have certain contracts with customers that represent customer commitments to purchase a minimum amount of our services over specified time periods. These contracts require us to provide services to our customers in the future and result in our having unfulfilled performance obligations (“UPOs”) to our customers related to the periods remaining under each contract. We have UPOs in many of our core business services, including transportation, terminalling and storage services. The UPOs will be recognized as revenue in the future as our customers utilize our services or when we estimate that our customers are not likely to use all or a portion of their commitments.

The following table provides the aggregate amount of the transaction price allocated to our UPOs as of September 30, 2018 by operating segment, including the range of years remaining on our contracts with customers and an estimate of revenues expected to be recognized over the next 12 months (dollars in thousands):



	Refined Products		Crude Oil		Marine Storage		Total
Balances at September 30, 2018	$	2,176,871	$	1,419,449	$	341,673	$	3,937,993
Remaining terms	1 - 20 years		1 - 10 years		1 - 6 years
Estimated revenues from UPOs to be recognized in the next 12 months	$	395,872	$	328,844	$	147,795	$	872,511

In computing the value of these future revenues, we have used the current rates in effect as of September 30, 2018 and have not included any estimates for future rate changes due to changes in the FERC index or other contractually negotiated rate escalations. Our UPO balances include the full amount of our customer commitments as of September 30, 2018 through the expiration of the related contracts. The UPO balances disclosed exclude all performance obligations for which the original expected term is one year or less, the consideration is variable or the future use of our services is fully at the discretion of our customers.


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

MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 (presented in thousands). Operating profit includes depreciation and amortization expense and G&A expense that management does not consider when evaluating the core profitability of our separate operating segments.



	Three Months Ended September 30, 2017
	Refined Products		Crude Oil			Marine Storage			Intersegment Eliminations			Total
Transportation and terminals revenue	$	289,030	$	116,305		$	42,501		$	(901	)	$	446,935
Product sales revenue	107,175		12,370			1,465			—			121,010
Affiliate management fee revenue	353		3,703			847			—			4,903
Total revenue	396,558		132,378			44,813			(901		)	572,848
Operating expenses	118,665		31,163			17,723			(2,183		)	165,368
Cost of product sales	103,391		16,630			1,798			—			121,819
(Earnings) losses of non-controlled entities	700		(31,244		)	(607		)	—			(31,151		)
Operating margin	173,802		115,829			25,899			1,282			316,812
Depreciation and amortization expense	27,469		12,584			8,574			1,282			49,909
G&A expense	23,808		9,266			4,128			—			37,202
Operating profit	$	122,525	$	93,979		$	13,197		$	—		$	229,701



	Three Months Ended September 30, 2018
	Refined Products			Crude Oil			Marine Storage			Intersegment Eliminations			Total
Transportation and terminals revenue	$	300,034		$	145,118		$	44,546		$	(923	)	$	488,775
Product sales revenue	129,926			12,666			1,811			—			144,403
Affiliate management fee revenue	351			3,463			1,028			—			4,842
Total revenue	430,311			161,247			47,385			(923		)	638,020
Operating expenses	112,279			45,195			17,178			(2,537		)	172,115
Cost of product sales	106,756			11,590			2,164			—			120,510
Earnings of non-controlled entities	(3,393		)	(49,420		)	(982		)	—			(53,795		)
Operating margin	214,669			153,882			29,025			1,614			399,190
Depreciation and amortization expense	30,440			15,145			9,029			1,614			56,228
G&A expense	28,751			12,766			5,872			—			47,389
Operating profit	$	155,478		$	125,971		$	14,124		$	—		$	295,573

MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	Nine Months Ended September 30, 2017
	Refined Products		Crude Oil			Marine Storage			Intersegment Eliminations			Total
Transportation and terminals revenue	$	808,818	$	329,813		$	136,702		$	(2,488	)	$	1,272,845
Product sales revenue	509,068		34,876			4,690			—			548,634
Affiliate management fee revenue	1,035		10,311			1,537			—			12,883
Total revenue	1,318,921		375,000			142,929			(2,488		)	1,834,362
Operating expenses	312,911		89,991			45,753			(6,401		)	442,254
Cost of product sales	396,292		37,814			6,564			—			440,670
(Earnings) losses of non-controlled entities	167		(76,388		)	(1,952		)	—			(78,173		)
Operating margin	609,551		323,583			92,564			3,913			1,029,611
Depreciation and amortization expense	81,440		35,947			24,803			3,913			146,103
G&A expense	75,429		30,376			15,071			—			120,876
Operating profit	$	452,682	$	257,260		$	52,690		$	—		$	762,632



	Nine Months Ended September 30, 2018
	Refined Products			Crude Oil			Marine Storage			Intersegment Eliminations			Total
Transportation and terminals revenue	$	851,492		$	409,329		$	134,892		$	(2,753	)	$	1,392,960
Product sales revenue	513,634			32,387			6,771			—			552,792
Affiliate management fee revenue	1,000			11,328			2,810			—			15,138
Total revenue	1,366,126			453,044			144,473			(2,753		)	1,960,890
Operating expenses	319,670			109,963			52,835			(7,212		)	475,256
Cost of product sales	434,632			32,401			6,748			—			473,781
Earnings of non-controlled entities	(5,614		)	(122,879		)	(2,350		)	—			(130,843		)
Operating margin	617,438			433,559			87,240			4,459			1,142,696
Depreciation and amortization expense	89,855			40,648			26,764			4,459			161,726
G&A expense	90,825			38,127			18,283			—			147,235
Operating profit	$	436,758		$	354,784		$	42,193		$	—		$	833,735

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, 2018 were comprised of:



Entity		Ownership Interest
BridgeTex Pipeline Company, LLC (“BridgeTex”)		30%
Double Eagle Pipeline LLC (“Double Eagle”)		50%
HoustonLink Pipeline Company, LLC (“HoustonLink”)		50%
MVP Terminalling, LLC (“MVP”)		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 September 2018, we sold a 20% interest in BridgeTex to an affiliate of OMERS Infrastructure Management, Inc. (“OMERS”), which reduced our ongoing investment in BridgeTex to a 30% interest. We received $578.5 million in cash from the sale, and we recorded a gain of $353.8 million on our consolidated statements of income. See Note 9 – Commitments and Contingencies for details regarding our indemnity to OMERS that was recorded in relation to the sale.

We serve as operator of BridgeTex, HoustonLink, MVP, 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 $0.7 million and $0.9 million during the three months ended September 30, 2017 and 2018, respectively, and $3.1 million and $2.6 million during the nine months ended September 30, 2017 and 2018, respectively.

We recorded the following revenue and expense transactions from certain of these non-controlled entities in our consolidated statements of income (in millions):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2018		2017		2018
Transportation and terminals revenue:
BridgeTex, pipeline capacity	$	9.1	$	9.9	$	27.0	$	29.5
Double Eagle, throughput revenue	$	1.3	$	1.0	$	3.1	$	3.9
Saddlehorn, storage revenue	$	0.5	$	0.5	$	1.6	$	1.6
Operating costs:
Seabrook, storage and ancillary services	$	—	$	4.0	$	—	$	4.0
Product sales revenue:
Powder Springs, butane sales	$	—	$	—	$	—	$	4.9
Cost of product sales:
Powder Springs, butane purchases	$	—	$	—	$	—	$	0.4

MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Our consolidated balance sheets reflected the following balances related to our investments in non-controlled entities (in millions):



	December 31, 2017						September 30, 2018
	Trade Accounts Receivable		Other Accounts Receivable		Other Accounts Payable		Trade Accounts Receivable		Other Accounts Receivable		Other Accounts Payable
BridgeTex	$	—	$	—	$	—	$	0.2	$	0.1	$	—
Double Eagle	$	0.5	$	—	$	—	$	0.3	$	—	$	—
HoustonLink	$	—	$	—	$	0.1	$	—	$	—	$	—
MVP	$	—	$	0.4	$	—	$	—	$	1.2	$	—
Powder Springs	$	—	$	0.9	$	—	$	—	$	2.1	$	—
Saddlehorn	$	—	$	0.1	$	—	$	—	$	0.2	$	—
Seabrook	$	—	$	0.2	$	—	$	—	$	—	$	2.1

The financial results from MVP and Texas Frontera are included in our marine storage segment, the financial results from BridgeTex, Double Eagle, HoustonLink, 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.

A summary of our investments in non-controlled entities follows (in thousands):




Investments at December 31, 2017	$	1,082,511
Additional investment	147,048
Sale of ownership interest in BridgeTex	(205,776		)
Other adjustments	502
Earnings of non-controlled entities:
Proportionate share of earnings	132,647
Amortization of excess investment and capitalized interest	(1,804		)
Earnings of non-controlled entities	130,843
Less:
Distributions from operations of non-controlled entities	147,950
Distributions from returns of investments in non-controlled entities	1,786
Investments at September 30, 2018	$	1,005,392

MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


5.	Inventory

Inventory at December 31, 2017 and September 30, 2018 was as follows (in thousands):



	December 31, 2017		September 30, 2018
Refined products	$	73,845	$	60,390
Liquefied petroleum gases	45,553		53,080
Transmix	33,319		43,588
Crude oil	23,763		16,129
Additives	5,865		6,179
Total inventory	$	182,345	$	179,366


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 $2.0 million and $2.7 million for the three months ended September 30, 2017 and 2018, respectively, and $7.4 million and $8.8 million for the nine months ended September 30, 2017 and 2018, respectively.

Additionally, we sponsor two union pension plans that cover certain union employees, a pension plan for all non-union employees and a postretirement benefit plan for certain employees. Net periodic benefit expense for the three and nine months ended September 30, 2017 and 2018 was as follows (in thousands):



	Three Months Ended					Three Months Ended
	September 30, 2017					September 30, 2018
	Pension Benefits			Other Postretirement Benefits		Pension Benefits			Other Postretirement Benefits
Components of net periodic benefit costs:
Service cost	$	5,125		$	51	$	6,424		$	58
Interest cost	2,466			111		2,816			104
Expected return on plan assets	(2,566		)	—		(3,055		)	—
Amortization of prior service credit	(45		)	—		(45		)	—
Amortization of actuarial loss	1,406			162		1,659			147
Settlement cost	289			—		—			—
Net periodic benefit cost	$	6,675		$	324	$	7,799		$	309

MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



	Nine Months Ended					Nine Months Ended
	September 30, 2017					September 30, 2018
	Pension Benefits			Other Postretirement Benefits		Pension Benefits			Other Postretirement Benefits
Components of net periodic benefit costs:
Service cost	$	15,373		$	182	$	28,393		$	174
Interest cost	7,398			356		12,054			312
Expected return on plan assets	(7,699		)	—		(9,057		)	—
Amortization of prior service credit	(136		)	—		(136		)	—
Amortization of actuarial loss	4,217			562		8,182			441
Settlement cost	2,015			—		—			—
Net periodic benefit cost	$	21,168		$	1,100	$	39,436		$	927

The service component of our net periodic benefit costs is presented in operating expense and G&A expense, and the non-service components are presented in other expense in our consolidated statements of income.

The changes in accumulated other comprehensive loss (“AOCL”) related to employee benefit plan assets and benefit obligations for the three and nine months ended September 30, 2017 and 2018 were as follows (in thousands):



	Three Months Ended						Three Months Ended
	September 30, 2017						September 30, 2018
Gains (Losses) Included in AOCL	Pension Benefits			Other Postretirement Benefits			Pension Benefits			Other Postretirement Benefits
Beginning balance	$	(54,138	)	$	(7,481	)	$	(96,352	)	$	(6,036	)
Amortization of prior service credit	(45		)	—			(45		)	—
Amortization of actuarial loss	1,406			162			1,659			147
Settlement cost	289			—			—			—
Ending balance	$	(52,488	)	$	(7,319	)	$	(94,738	)	$	(5,889	)



	Nine Months Ended						Nine Months Ended
	September 30, 2017						September 30, 2018
Gains (Losses) Included in AOCL	Pension Benefits			Other Postretirement Benefits			Pension Benefits			Other Postretirement Benefits
Beginning balance	$	(58,584	)	$	(7,881	)	$	(97,226	)	$	(6,597	)
Net actuarial gain (loss)	—			—			(5,558		)	267
Amortization of prior service credit	(136		)	—			(136		)	—
Amortization of actuarial loss	4,217			562			8,182			441
Settlement cost	2,015			—			—			—
Ending balance	$	(52,488	)	$	(7,319	)	$	(94,738	)	$	(5,889	)

The net periodic benefit costs and AOCL presented in the tables above for the nine month period ending September 30, 2018 include one-time corrections made in first quarter 2018 resulting from an error in our third-party actuary’s valuation of our pension liabilities and net periodic pension expenses. See Note 1 – Organization, Description of Business and Basis of Presentation for more details regarding this error correction.

MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Contributions estimated to be paid into the plans in 2018 are $31.7 million and $0.6 million for the pension plans and other postretirement benefit plan, respectively.


7.	Debt

Long-term debt at December 31, 2017 and September 30, 2018 was as follows (in thousands):



	December 31, 2017			September 30, 2018
Commercial paper	$	—		$	—
6.40% Notes due 2018	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
4.20% Notes due 2047	500,000			500,000
Face value of long-term debt	4,550,000			4,300,000
Unamortized debt issuance costs⁽¹⁾	(29,472		)	(27,683		)
Net unamortized debt premium (discount)⁽¹⁾	215			(2,127		)
Net unamortized amount of gains from historical fair value hedges⁽¹⁾	3,749			1,315
Long-term debt, net, including current portion	4,524,492			4,271,505
Less: current portion of long-term debt, net	250,974			552,898
Long-term debt, net	$	4,273,518		$	3,718,607


(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.

Other Debt

Revolving Credit Facilities. At September 30, 2018, the total borrowing capacity under our revolving credit facility maturing October 26, 2022 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, 2018. Borrowings under this facility may be used for general partnership purposes, including capital expenditures. As of both December 31, 2017 and September 30, 2018, 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.

MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 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 1.3% for the year ended December 31, 2017 and 2.3% for the nine months ended September 30, 2018.


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. We record any ineffectiveness on interest rate derivatives designated as hedging instruments to interest expense and the change in fair value of interest rate derivatives that we do not designate as hedging instruments to other income or expense in our results of operations. For the effective portion of interest rate cash flow hedges, we record the noncurrent portion of unrealized gains or losses as an adjustment to other comprehensive income with the current portion recorded as an adjustment to interest expense. For the effective portion of fair value hedges on long-term debt, we record the noncurrent portion of gains or losses as an adjustment to long-term debt with the current portion recorded as an adjustment to interest expense. Adjustments resulting from discontinued hedges continue to be recognized in accordance with their historic hedging relationships.

During 2018, we entered into $200.0 million of treasury lock agreements to protect against the risk of variability of a portion of debt issuances we anticipate to occur in 2018 and 2019. The fair value of these interest rate derivative agreements at September 30, 2018 was recorded as a current asset of $5.2 million, with the offset recorded to other comprehensive income. We account for these agreements as cash flow hedges.

We entered into $100.0 million of interest rate swap agreements in 2016 to protect against the variability of future interest payments on a portion of debt we anticipated issuing in 2018. These agreements were accounted for as cash flow hedges. In September 2018, we terminated and settled these agreements for a gain of $20.9 million. The gain was recorded to other comprehensive income and will be recognized into earnings as an adjustment to our periodic interest accruals over the life of the expected debt issuance.

Commodity Derivatives

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-traded 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, whereby changes in the mark-to-market values of such contracts are not recognized in income; rather the revenues and expenses associated with such transactions are recognized during the period when commodities are physically delivered or received. Physical forward commodity contracts subject to this exception are evaluated for the probability of future delivery and are periodically tested once the

MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

forecasted period has passed to determine whether similar forward contracts are probable of physical delivery in the future.

We record the effective portion of the gains or losses for commodity-based contracts designated 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. We recognize the change in fair value of economic hedges that hedge against changes in the price of petroleum products that we expect to sell or purchase in the future currently in earnings as adjustments to product sales revenue, cost of product sales or operating expenses, as applicable.

Our open futures contracts at September 30, 2018 were as follows:



Type of Contract/Accounting Methodology	Product Represented by the Contract and Associated Barrels	Maturity Dates
Futures - Economic Hedges	5.4 million barrels of refined products and crude oil	Between October 2018 and April 2019
Futures - Economic Hedges	1.7 million barrels of butane and natural gasoline	Between October 2018 and April 2019

Energy Commodity Derivatives Contracts and Deposits Offsets

At December 31, 2017 and September 30, 2018, we had margin deposits of $36.7 million and $47.4 million, respectively, for our future contracts with our counterparties, which were recorded as current assets 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, 2017 and September 30, 2018 (in thousands):

Description

Gross Amounts of Recognized Liabilities