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Magellan Midstream Partners, L.P. - Quarter Report: 2018 September (Form 10-Q)





 
 
 
 
 
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
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 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
 
 
 
 
 
 
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
 
 
 
Growth Projects and Recent Developments
 
 
 
 
 
 
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




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.

2




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.

3




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.

4




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.

5






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.


6






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.

7






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

8






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.



9






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

10






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.


11






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.

12






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.


13






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

14






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


15






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

 
 
 
 
 
 
 
 
 
 



16






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


17






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

 
 
 
 


18






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

  

19






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.

20






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.


21






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

22






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
 
Gross Amounts of Assets Offset in the Consolidated Balance Sheets
 
Net Amounts of Liabilities Presented in the Consolidated Balance Sheets(2)
 
Margin Deposit Amounts Not Offset in the Consolidated Balance Sheets
 
Net Asset Amount(1)
As of December 31, 2017
 
$
(38,936
)
 
$
12,851

 
$
(26,085
)
 
$
36,690

 
$
10,605

As of September 30, 2018
 
$
(55,087
)
 
$
22,843

 
$
(32,244
)
 
$
47,354

 
$
15,110

 
 
 
 
 
 
 
 
 
 
 
(1)
Amount represents the maximum loss we would incur if all of our counterparties failed to perform on their derivative contracts.
(2)
Net amount includes energy commodity derivative contracts classified as current liabilities of $25,694 and noncurrent liabilities of $391 at December 31, 2017. Net amount includes energy commodity derivative contracts classified as current liabilities of $32,244 at September 30, 2018.


23






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



Impact of Derivatives on Our Financial Statements

Comprehensive Income

The changes in derivative activity included in AOCL for the three and nine months ended September 30, 2017 and 2018 were as follows (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
Derivative Losses Included in AOCL
2017
 
2018
 
2017
 
2018
Beginning balance
$
(34,804
)
 
$
(25,165
)
 
$
(34,776
)
 
$
(33,755
)
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

Ending balance
$
(34,292
)
 
$
(17,573
)
 
$
(34,292
)
 
$
(17,573
)

The following is a summary of the effect on our consolidated statements of income for the three and nine months ended September 30, 2017 and 2018 of derivatives that were designated as cash flow hedges (in thousands):
 
 
Interest Rate Contracts
 
 
Amount of Gain (Loss) Recognized in AOCL on Derivative
 
Location of Loss Reclassified from AOCL into  Income
 
Amount of Loss Reclassified from AOCL into Income
Three Months Ended September 30, 2017
 
$
(228
)
 
Interest expense
 
$
(740
)
Three Months Ended September 30, 2018
 
$
6,852

 
Interest expense
 
$
(740
)
Nine Months Ended September 30, 2017
 
$
(1,735
)
 
Interest expense
 
$
(2,219
)
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
$
13,963

 
Interest expense
 
$
(2,219
)
 
 
 
 
 
 
 

As of September 30, 2018, the net loss estimated to be classified to interest expense over the next twelve months from AOCL is approximately $2.3 million. This amount relates to the amortization of losses on interest rate contracts over the life of the related debt instruments.


24






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



We used futures contracts designated as fair value hedges to hedge against changes in the fair value of crude oil that was contractually reserved as tank bottoms and included with other noncurrent assets on our consolidated balance sheets. During September 2017, as a result of contract renegotiations, we sold a portion of the tank bottoms, settled the related hedges and transferred the permanent portion of the tank bottoms from noncurrent assets to PP&E. The effective portions of the fair value gains or losses on these futures contracts were offset by fair value gains or losses on the crude oil, and there was no ineffectiveness recognized. 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 crude oil were as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2018
 
2017
 
2018
Gain (loss) recognized in other income/expense on derivatives (futures contracts)
 
$
(1,661
)
 
$
122

 
$
5,107

 
(427
)
Gain (loss) recognized in other income/expense on hedged item (crude oil)
 
$
1,661

 
$
(122
)
 
$
(5,107
)
 
427

 
 
 
 
 
 
 
 
 

The differential between the current spot price and forward price was excluded from the assessment of hedge effectiveness for these fair value hedges. For the three and nine months ended September 30, 2017, we recognized a gain of $0.7 million and $2.4 million, respectively, for the amounts we excluded from the assessment of effectiveness of these fair value hedges, which we reported as other (income) expense on our consolidated statements of income.
The following table provides a summary of the effect on our consolidated statements of income for the three and nine months ended September 30, 2017 and 2018 of derivatives accounted for as economic hedges (in thousands):
 
 
 
 
Amount of Gain (Loss) Recognized on Derivatives
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
Location of Gain (Loss)
Recognized on Derivatives
 
September 30,
 
September 30,
Derivative Instrument
 
 
2017
 
2018
 
2017
 
2018
Futures contracts
 
Product sales revenue
 
$
(47,336
)
 
$
(24,354
)
 
$
(4,442
)
 
$
(70,140
)
Futures contracts
 
Operating expenses
 
663

 

 
663

 

Futures contracts
 
Cost of product sales
 
19,660

 
11,665

 
19,713

 
16,058

 
 
Total
 
$
(27,013
)
 
$
(12,689
)
 
$
15,934

 
$
(54,082
)
The impact of the derivatives in the above table was reflected as cash from operations on our consolidated statements of cash flows.

25






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



Balance Sheets
The following tables provide a summary of the fair value of derivatives, which are presented on a net basis in our consolidated balance sheets, that were designated as hedging instruments as of December 31, 2017 and September 30, 2018 (in thousands):
 
 
December 31, 2017
 
 
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
 
$
173

Interest rate contracts
 
Other current assets
 
12,177

 
Other current liabilities
 

 
 
Total
 
$
12,177

 
Total
 
$
173

 
 
 
September 30, 2018
 
 
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
 
$
189

Interest rate contracts
 
Other current assets
 
5,215

 
Other current liabilities
 

 
 
Total
 
$
5,215

 
Total
 
$
189

 
The following tables provide a summary of the fair value of derivatives, which are presented on a net basis in our consolidated balance sheets, that were not designated as hedging instruments as of December 31, 2017 and September 30, 2018 (in thousands):
 
 
December 31, 2017
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Futures contracts
 
Energy commodity derivatives contracts, net
 
$
12,605

 
Energy commodity derivatives contracts, net
 
$
38,126

Futures contracts
 
Other noncurrent assets
 
246

 
Other noncurrent liabilities
 
637

 
 
Total
 
$
12,851

 
Total
 
$
38,763

 
 
 
 
 
 
 
 
 
 
 
September 30, 2018
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Futures contracts
 
Energy commodity derivatives contracts, net
 
$
22,843

 
Energy commodity derivatives contracts, net
 
$
54,898

 

9.
Commitments and Contingencies

Butane Blending Patent Infringement Proceeding

On October 4, 2017, Sunoco Partners Marketing & Terminals L.P. (“Sunoco”) brought an action for patent infringement in the U.S. District Court for the District of Delaware alleging Magellan Midstream Partners, L.P. (“Magellan”) and Powder Springs Logistics, LLC (“Powder Springs”) have infringed patents relating to butane

26






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



blending at the Powder Springs facility located in Powder Springs, Georgia. Sunoco has since submitted pleadings alleging that Magellan has also infringed various patents relating to butane blending at nine Magellan facilities, in addition to Powder Springs. Sunoco is seeking an undetermined amount of damages, attorneys’ fees and a permanent injunction enjoining Magellan and Powder Springs from infringing on the subject patents. We deny and are vigorously defending against all claims asserted by Sunoco. Although it is not possible to predict the ultimate outcome, we believe, based on our current understanding of the applicable facts and law, that the ultimate resolution of this matter will not have a material adverse impact on our results of operations, financial position or cash flows.

Environmental Liabilities

Liabilities recognized for estimated environmental costs were $19.3 million and $23.6 million at December 31, 2017 and September 30, 2018, 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 $3.0 million and $5.5 million for the three months ended September 30, 2017 and 2018, respectively, and $7.5 million and $10.8 million for the nine months ended September 30, 2017 and 2018, respectively.

Environmental Receivables

Receivables from insurance carriers and other third parties related to environmental matters were $7.2 million at December 31, 2017, of which $0.5 million and $6.7 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 $6.7 million at September 30, 2018, of which $0.7 million and $6.0 million were recorded to other accounts receivable and long-term receivables, respectively, on our consolidated balance sheets.

Other

In connection with the sale of part of our interest in BridgeTex (see Note 4 – Investments in Non-Controlled Entities), we agreed to indemnify an affiliate of OMERS for certain claims involving BridgeTex.  The maximum obligation is limited to the net proceeds we received.  We probability-weighted potential outcome scenarios to estimate the value of such indemnification obligations. As a result, we reduced the gain recognized on the transaction by $16.0 million and recorded the same estimate in other noncurrent liabilities on our consolidated balance sheets this period. We believe, however, that the most likely outcome is that no significant liability will result from such obligations.

We have entered into an agreement to guarantee our 50% pro rata share, up to $25.0 million, of obligations under Powder Springs’ credit facility. As of September 30, 2018, our consolidated balance sheets reflected a $0.4 million other current liability and a corresponding increase in our investment in non-controlled entities on our consolidated balance sheets to reflect the fair value of this guarantee.

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.


10.
Long-Term Incentive Plan
The compensation committee of our general partner’s board of directors administers our long-term incentive plan (“LTIP”) covering certain of our employees and the independent 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 estimated units remaining available under the LTIP at September 30, 2018 total 2.1 million.
 

27






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



Our equity-based incentive compensation expense was as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2018
 
2017
 
2018
Performance-based awards
 
$
2,728

 
$
7,087

 
$
12,119

 
$
22,176

Time-based awards
 
738

 
846

 
2,064

 
2,436

Total
 
$
3,466

 
$
7,933

 
$
14,183

 
$
24,612

 
 
 
 
 
 
 
 
 
Allocation of LTIP expense on our consolidated statements of income:
 
 
 
 
 
 
 
 
G&A expense
 
$
3,430

 
$
7,867

 
$
14,062

 
$
24,412

Operating expense
 
36

 
66

 
121

 
200

Total
 
$
3,466

 
$
7,933

 
$
14,183

 
$
24,612


On February 1, 2018, 294,054 unit awards were granted pursuant to our LTIP. These awards included both performance-based and time-based awards and have a three-year vesting period that will end on December 31, 2020.

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 unit awards 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 unit awards associated with our LTIP that have not yet vested.



28






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 have been issued pursuant to this program.

The following table details the changes in the number of our limited partner units outstanding from December 31, 2017 through September 30, 2018:

Limited partner units outstanding on December 31, 2017
 
228,024,556

January 2018–Settlement of employee LTIP awards
 
168,913

During 2018–Other(a)
 
1,691

Limited partner units outstanding on September 30, 2018
 
228,195,160

 
 
 
(a) Limited partner units issued to settle the equity-based retainer paid to an independent director of our general partner.

Distributions

Distributions we paid during 2017 and 2018 were as follows (in thousands, except per unit amounts):
 
Payment Date
 
Per Unit Cash
Distribution
Amount
 
Total Cash Distribution to Limited Partners
02/14/2017
 
 
$
0.8550

 
 
 
$
194,961

 
05/15/2017
 
 
0.8725

 
 
 
198,951

 
08/14/2017
 
 
0.8900

 
 
 
202,942

 
Through 09/30/2017
 
 
2.6175

 
 
 
596,854

 
11/14/2017
 
 
0.9050

 
 
 
206,362

 
Total
 
 
$
3.5225

 
 
 
$
803,216

 
 
 
 
 
 
 
 
 
 
02/14/2018
 
 
$
0.9200

 
 
 
$
209,940

 
05/15/2018
 
 
0.9375

 
 
 
213,933

 
08/14/2018
 
 
0.9575

 
 
 
218,497

 
Through 09/30/2018
 
 
2.8150

 
 
 
642,370

 
11/14/2018(a)
 
 
0.9775

 
 
 
223,061

 
Total
 
 
$
3.7925

 
 
 
$
865,431

 
 
 
 
 
 
 
 
 
 
(a) Our general partner’s board of directors declared this cash distribution in October 2018 to be paid on November 14, 2018 to unitholders of record at the close of business on November 7, 2018.



29






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



12.
Fair Value

Fair Value Methods and Assumptions - Financial Assets and Liabilities.

We used the following methods and assumptions in estimating fair value of our financial assets and liabilities:

Energy commodity derivatives contracts. These include exchange-traded futures contracts related to petroleum products. These contracts are carried at fair value on our consolidated balance sheets and are valued based on quoted prices in active markets. See Note 8 – Derivative Financial Instruments for further disclosures regarding these contracts.

Interest rate contracts. These include interest rate hedge agreements to protect against the risk of variability of interest payments on future debt. These contracts are carried at fair value on our consolidated balance sheets and are valued based on an assumed exchange, at the end of each period, in an orderly transaction with a market participant in the market in which the financial instrument is traded. The exchange value was calculated using present value techniques on estimated future cash flows based on forward interest rate curves. See Note 8 – Derivative Financial Instruments for further disclosures regarding these contracts.

Long-term receivables. These primarily include payments receivable under a direct-financing leasing arrangement and cost reimbursement payments receivable. These receivables were recorded at fair value on our consolidated balance sheets, using then-current market rates to estimate the present value of future cash flows.

Debt. The fair value of our publicly traded notes was based on the prices of those notes at December 31, 2017 and September 30, 2018; however, where recent observable market trades were not available, prices were determined using adjustments to the last traded value for that debt issuance or by adjustments to the prices of similar debt instruments of peer entities that are actively traded. The carrying amount of borrowings, if any, under our revolving credit facility and our commercial paper program approximates fair value due to the frequent repricing of these obligations.

Fair Value Measurements - Financial Assets and Liabilities

The following tables summarize the carrying amounts, fair values and fair value measurements recorded or disclosed as of December 31, 2017 and September 30, 2018 based on the three levels established by ASC 820, Fair Value Measurements and Disclosures (in thousands):
 
 
December 31, 2017
Assets (Liabilities)
 
 
 
 
 
Fair Value Measurements using:
 
Carrying Amount
 
Fair Value
 
Quoted Prices  in Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Energy commodity derivatives contracts
 
$
(26,085
)
 
$
(26,085
)
 
$
(26,085
)
 
$

 
$

Interest rate contracts
 
$
12,177

 
$
12,177

 
$

 
$
12,177

 
$

Long-term receivables
 
$
27,676

 
$
27,676

 
$

 
$

 
$
27,676

Debt
 
$
(4,524,492
)
 
$
(4,826,480
)
 
$

 
$
(4,826,480
)
 
$



30






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



 
 
September 30, 2018
Assets (Liabilities)
 
 
 
 
 
Fair Value Measurements using:
 
Carrying Amount
 
Fair Value
 
Quoted Prices in Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Energy commodity derivatives contracts
 
$
(32,244
)
 
$
(32,244
)
 
$
(32,244
)
 
$

 
$

Interest rate contracts
 
$
5,215

 
$
5,215

 
$

 
$
5,215

 
$

Long-term receivables
 
$
23,520

 
$
23,520

 
$

 
$

 
$
23,520

Debt
 
$
(4,271,505
)
 
$
(4,314,870
)
 
$

 
$
(4,314,870
)
 
$



13.
Related Party Transactions

Stacy P. Methvin is an independent member of our general partner’s board of directors and is also a director of one of our customers.  We received tariff and other ancillary revenue from this customer of $4.1 million and $6.0 million for the three months ended September 30, 2017 and 2018, respectively, and $12.5 million and $14.4 million for the nine months ended September 30, 2017 and 2018, respectively. We recorded receivables of $1.6 million and $3.0 million from this customer at December 31, 2017 and September 30, 2018, respectively.  The tariff revenue we recognized from this customer was in the normal course of business, with rates determined in accordance with published tariffs. 

See Note 4 – Investments in Non-Controlled Entities for details of transactions with our joint ventures.


14.
Subsequent Events

Recognizable events

No recognizable events occurred subsequent to September 30, 2018.

Non-recognizable events

Cash Distribution. In October 2018, our general partner’s board of directors declared a quarterly distribution of $0.9775 per unit for the period of July 1, 2018 through September 30, 2018. This quarterly cash distribution will be paid on November 14, 2018 to unitholders of record on November 7, 2018. The total cash distributions expected to be paid under this declaration are approximately $223.1 million.



31




ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

We are a publicly traded limited partnership 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.

The following discussion provides an analysis of the results for each of our operating segments, an overview of our liquidity and capital resources and other items related to our partnership. The following discussion and analysis should be read in conjunction with (i) our accompanying interim consolidated financial statements and related notes and (ii) our consolidated financial statements, related notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2017.


Growth Projects

Permian Gulf Coast Pipeline. In September 2018, we announced plans for a joint project with Energy Transfer LP, MPLX LP and Delek US Holdings, Inc. to construct a new 30-inch diameter common carrier pipeline to transport crude oil from the Permian Basin to the Texas Gulf Coast region. The 600-mile pipeline system has received sufficient commitments to proceed with construction and is expected to be operational in mid-2020, subject to receipt of customary regulatory and board approvals of the respective entities. As currently contemplated, we expect our portion of this project to cost approximately $500 million.

West Texas Expansion. In response to shipper demand and in connection with our previously-announced East Houston to Hearne, Texas pipeline project, we are expanding the western leg of our refined petroleum products pipeline system in Texas to approximately 175,000 barrels per day (bpd) from our current capacity of 100,000 bpd.  The expansion is supported by long-term customer commitments and will be accomplished by a combination of increased pipeline diameter along our existing route and construction of 140 miles of new pipe.  We expect this project to cost a total of approximately $500 million, with the expanded capacity available mid-2020, subject to receipt of all necessary permits and approvals.

Recent Developments

Investment in BridgeTex Pipeline Company, LLC (“BridgeTex”). In September 2018, we sold a 20% interest in BridgeTex to an affiliate of OMERS Infrastructure Management, Inc., 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. We continue to serve as the operator of BridgeTex.

Cash Distribution. In October 2018, the board of directors of our general partner declared a quarterly cash distribution of $0.9775 per unit for the period of July 1, 2018 through September 30, 2018. This quarterly cash

32




distribution will be paid on November 14, 2018 to unitholders of record on November 7, 2018. Total distributions expected to be paid under this declaration are approximately $223.1 million.


Results of Operations

We believe that investors benefit from having access to the same financial measures utilized by management. Operating margin, which is presented in the following tables, is an important measure used by management to evaluate the economic performance of our core operations. Operating margin is not a generally accepted accounting principles (“GAAP”) measure, but the components of operating margin are computed using amounts that are determined in accordance with GAAP. A reconciliation of operating margin to operating profit, which is its nearest comparable GAAP financial measure, is included in the following tables. Operating profit includes expense items, such as depreciation and amortization expense and general and administrative (“G&A”) expense, which management does not focus on when evaluating the core profitability of our separate operating segments. Additionally, product margin, which management primarily uses to evaluate the profitability of our commodity-related activities, is provided in this table. Product margin is a non-GAAP measure; however, its components of product sales and cost of product sales are determined in accordance with GAAP. Our butane blending, fractionation and other commodity-related activities generate significant revenue. We believe the product margin from these activities, which takes into account the related cost of product sales, better represents its importance to our results of operations.

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 were corrected in first quarter 2018. As a result, our financial results for the nine months ended September 30, 2018 include a one-time $16.0 million pension correction, which included a $5.7 million increase to operating expenses, $3.4 million increase to G&A costs and $6.9 million increase to other expense below operating profit. See Note 1 – Organization, Description of Business and Basis of Presentation in Item 1 of Part I of this report for further information.
 

33





Three Months Ended September 30, 2017 compared to Three Months Ended September 30, 2018
 
Three Months Ended September 30,
 
Variance
Favorable  (Unfavorable)
 
2017
 
2018
 
$ Change
 
% Change
Financial Highlights ($ in millions, except operating statistics)
 
 
 
 
 
 
 
Transportation and terminals revenue:
 
 
 
 
 
 
 
Refined products
$
289.0

 
$
300.0

 
$
11.0

 
4
Crude oil
116.3

 
145.1

 
28.8

 
25
Marine storage
42.5

 
44.6

 
2.1

 
5
Intersegment eliminations
(0.8
)
 
(0.9
)
 
(0.1
)
 
(13)
Total transportation and terminals revenue
447.0

 
488.8

 
41.8

 
9
Affiliate management fee revenue
4.9

 
4.8

 
(0.1
)
 
(2)
Operating expenses:
 
 
 
 
 
 
 
Refined products
118.7

 
112.3

 
6.4

 
5
Crude oil
31.2

 
45.2

 
(14.0
)
 
(45)
Marine storage
17.8

 
17.1

 
0.7

 
4
Intersegment eliminations
(2.3
)
 
(2.5
)
 
0.2

 
9
Total operating expenses
165.4

 
172.1

 
(6.7
)
 
(4)
Product margin:
 
 
 
 
 
 
 
Product sales revenue
121.0

 
144.4

 
23.4

 
19
Cost of product sales
121.9

 
120.6

 
1.3

 
1
Product margin
(0.9
)
 
23.8

 
24.7

 
n/a
Earnings of non-controlled entities
31.2

 
53.8

 
22.6

 
72
Operating margin
316.8

 
399.1

 
82.3

 
26
Depreciation and amortization expense
49.9

 
56.2

 
(6.3
)
 
(13)
G&A expense
37.2

 
47.4

 
(10.2
)
 
(27)
Operating profit
229.7

 
295.5

 
65.8

 
29
Interest expense (net of interest income and interest capitalized)
48.3

 
51.5

 
(3.2
)
 
(7)
Gain on sale of asset
(18.5
)
 
(353.8
)
 
335.3

 
1,812
Other expense
0.5

 
1.7

 
(1.2
)
 
(240)
Income before provision for income taxes
199.4

 
596.1

 
396.7

 
199
Provision for income taxes
0.9

 
1.5

 
(0.6
)
 
(67)
Net income
$
198.5

 
$
594.6

 
$
396.1

 
200
Operating Statistics:
 
 
 
 
 
 
 
Refined products:
 
 
 
 
 
 
 
Transportation revenue per barrel shipped
$
1.521

 
$
1.600

 
 
 
 
Volume shipped (million barrels):
 
 
 
 
 
 
 
Gasoline
75.8

 
73.4

 
 
 
 
Distillates
41.0

 
45.6

 
 
 
 
Aviation fuel
6.7

 
8.1

 
 
 
 
Liquefied petroleum gases
3.9

 
4.4

 
 
 
 
Total volume shipped
127.4

 
131.5

 
 
 
 
Crude oil:
 
 
 
 
 
 
 
Magellan 100%-owned assets:
 
 
 
 
 
 
 
Transportation revenue per barrel shipped
$
1.332

 
$
1.266

 
 
 
 
Volume shipped (million barrels)
48.4

 
62.8

 
 
 
 
Crude oil terminal average utilization (million barrels per month)
14.9

 
16.0

 
 
 
 
Select joint venture pipelines:
 
 
 
 
 
 
 
BridgeTex - volume shipped (million barrels)(1)
25.7

 
36.5

 
 
 
 
Saddlehorn - volume shipped (million barrels)(2)
4.4

 
6.7

 
 
 
 
Marine storage:
 
 
 
 
 
 
 
Marine terminal average utilization (million barrels per month)
22.5

 
22.6

 
 
 
 

(1) These volumes reflect the total shipments for the BridgeTex pipeline, which was owned 50% by us through September 28, 2018 and 30% thereafter.
(2) These volumes reflect the total shipments for the Saddlehorn pipeline, which is owned 40% by us.


34




Transportation and terminals revenue increased $41.8 million resulting from:
an increase in refined products revenue of $11.0 million. Higher shipments in the current period resulted from stronger demand for refined products in large part due to increased distillate demand in crude oil production regions. Additionally, the average rate per barrel in the current period was favorably impacted by the mid-year tariff adjustments;
an increase in crude oil revenue of $28.8 million primarily due to more spot shipments on the Longhorn pipeline due to the favorable pricing differential between the Permian Basin and Houston which resulted in more volume at a higher average rate. We also benefited from higher volumes from our condensate splitter at Corpus Christi, higher volumes on our Houston distribution system and higher revenues from new system storage and ancillary services that we provided to our shippers in conjunction with capacity from our storage contracts with Seabrook Logistics, LLC (“Seabrook”). Overall, the average crude oil rate per barrel decreased between periods due to significantly higher volumes on our Houston distribution system, which move at a lower rate; and
an increase in marine storage revenue of $2.1 million primarily due to higher rates and more ancillary fees reflecting increased customer activity as the prior year was negatively impacted by Hurricane Harvey.
Operating expenses increased by $6.7 million primarily resulting from:
a decrease in refined products expenses of $6.4 million primarily due to more favorable product overages (which reduce operating expenses) partially offset by higher property taxes due to a favorable adjustment in the 2017 period and more integrity spending in the current year;
an increase in crude oil expenses of $14.0 million primarily due to fees we paid to Seabrook for contract storage and ancillary services that we utilized to provide services to our shippers, higher environmental accruals, higher power costs and less favorable product overages; and
a decrease in marine storage expenses of $0.7 million primarily due to environmental accruals and clean-up work related to Hurricane Harvey that negatively impacted the 2017 period.
Product sales revenue resulted primarily from our butane blending activities, transmix fractionation and the sale of tender deductions and product overages from our operations. We utilize futures contracts to hedge against changes in the price of petroleum products we expect to sell in future periods, as well as to hedge against changes in the price of butane we expect to purchase. See Note 8 – Derivative Financial Instruments in Item 1 of Part I for a discussion of our hedging strategies and how our use of futures contracts impacts our product margin, and Other Items – Commodity Derivative Agreements – Impact of Commodity Derivatives on Results of Operations below for more information about our futures contracts. Product margin increased $24.7 million primarily due to lower unrealized losses on futures contracts recognized in the current period compared to third quarter 2017.
Earnings of non-controlled entities increased $22.6 million primarily due to increased earnings from BridgeTex mainly attributable to incremental shipments related to new commitments that began in first quarter 2018 for recently added pipeline capacity and more spot shipments due to the favorable pricing differential between the Permian Basin and Houston. Earnings from Saddlehorn Pipeline Company, LLC (“Saddlehorn”) were higher as well primarily as a result of a contractual step-up in committed shipments beginning September 2017 and again in September 2018. Increased butane blending volumes and margins resulted in higher earnings from Powder Springs Logistics, LLC (“Powder Springs”), and recently completed construction of additional storage contributed to higher earnings from Seabrook.
Depreciation and amortization expense increased $6.3 million primarily due to the commencement of expansion capital projects recently placed into service.
G&A expense increased $10.2 million primarily due to higher personnel costs resulting from an increase in employee headcount as a result of the growth of our business and higher incentive compensation expense due to company performance in 2018.

35




Interest expense, net of interest income and interest capitalized, increased $3.2 million in third quarter 2018. Our average outstanding debt increased from $4.3 billion in third quarter 2017 to $4.7 billion in third quarter 2018 primarily due to borrowings for expansion capital expenditures. Our weighted-average interest rate in third quarter 2018 was 4.6% compared to 4.7% in third quarter 2017.
Gain on sale of asset was $335.3 million favorable. We recognized a $353.8 million gain on the sale of a portion of our interest in BridgeTex in third quarter 2018 (see Note 4 – Investments in Non-Controlled Entities in Item 1 of Part I for further details about this sale). In third quarter 2017, we recognized an $18.5 million gain in connection with the sale of an inactive terminal along our refined products pipeline system.
Other expense was $1.2 million unfavorable primarily due to less favorable valuation adjustments associated with our crude oil tank bottoms.
Provision for income taxes was $0.6 million unfavorable primarily due to higher earnings in the current period.


36




Nine Months Ended September 30, 2017 compared to Nine Months Ended September 30, 2018
 
Nine Months Ended September 30,
 
Variance
Favorable  (Unfavorable)
 
2017
 
2018
 
$ Change
 
% Change
Financial Highlights ($ in millions, except operating statistics)
 
 
 
 
 
 
 
Transportation and terminals revenue:
 
 
 
 
 
 
 
Refined products
$
808.8

 
$
851.5

 
$
42.7

 
5
Crude oil
329.8

 
409.3

 
79.5

 
24
Marine storage
136.7

 
134.9

 
(1.8
)
 
(1)
Intersegment eliminations
(2.4
)
 
(2.7
)
 
(0.3
)
 
(13)
Total transportation and terminals revenue
1,272.9

 
1,393.0

 
120.1

 
9
Affiliate management fee revenue
12.9

 
15.1

 
2.2

 
17
Operating expenses:
 
 
 
 
 
 
 
Refined products
312.9

 
319.7

 
(6.8
)
 
(2)
Crude oil
90.0

 
110.0

 
(20.0
)
 
(22)
Marine storage
45.8

 
52.8

 
(7.0
)
 
(15)
Intersegment eliminations
(6.4
)
 
(7.2
)
 
0.8

 
13
Total operating expenses
442.3

 
475.3

 
(33.0
)
 
(7)
Product margin:
 
 
 
 
 
 
 
Product sales revenue
548.6

 
552.8

 
4.2

 
1
Cost of product sales
440.7

 
473.8

 
(33.1
)
 
(8)
Product margin
107.9

 
79.0

 
(28.9
)
 
(27)
Earnings of non-controlled entities
78.2

 
130.8

 
52.6

 
67
Operating margin
1,029.6

 
1,142.6

 
113.0

 
11
Depreciation and amortization expense
146.1

 
161.7

 
(15.6
)
 
(11)
G&A expense
120.9

 
147.2

 
(26.3
)
 
(22)
Operating profit
762.6

 
833.7

 
71.1

 
9
Interest expense (net of interest income and interest capitalized)
143.1

 
153.7

 
(10.6
)
 
(7)
Gain on sale of asset
(18.5
)
 
(353.8
)
 
335.3

 
1,812
Other expense
3.7

 
10.3

 
(6.6
)
 
(178)
Income before provision for income taxes
634.3

 
1,023.5

 
389.2

 
61
Provision for income taxes
2.7

 
3.6

 
(0.9
)
 
(33)
Net income
$
631.6

 
$
1,019.9

 
$
388.3

 
61
Operating Statistics:
 
 
 
 
 
 
 
Refined products:
 
 
 
 
 
 
 
Transportation revenue per barrel shipped
$
1.489

 
$
1.524

 
 
 
 
Volume shipped (million barrels):
 
 
 
 
 
 
 
Gasoline
218.7

 
219.0

 
 
 
 
Distillates
119.6

 
132.7

 
 
 
 
Aviation fuel
20.2

 
21.3

 
 
 
 
Liquefied petroleum gases
9.6

 
10.4

 
 
 
 
Total volume shipped
368.1

 
383.4

 
 
 
 
Crude oil:
 
 
 
 
 
 
 
Magellan 100%-owned assets:
 
 
 
 
 
 
 
Transportation revenue per barrel shipped
$
1.412

 
$
1.325

 
 
 
 
Volume shipped (million barrels)
137.0

 
168.4

 
 
 
 
Crude oil terminal average utilization (million barrels per month)
15.5

 
16.1

 
 
 
 
Select joint venture pipelines:
 
 
 
 
 
 
 
BridgeTex - volume shipped (million barrels)(1)
66.4

 
100.0

 
 
 
 
Saddlehorn - volume shipped (million barrels)(2)
12.1

 
18.5

 
 
 
 
Marine storage:
 
 
 
 
 
 
 
Marine terminal average utilization (million barrels per month)
23.4

 
22.6

 
 
 
 

(1) These volumes reflect the total shipments for the BridgeTex pipeline, which was owned 50% by us through September 28, 2018 and 30% thereafter.
(2) These volumes reflect the total shipments for the Saddlehorn pipeline, which is owned 40% by us.


37




Transportation and terminals revenue increased $120.1 million resulting from:
an increase in refined products revenue of $42.7 million. Shipments increased in the current period primarily due to stronger demand for refined products in large part due to higher distillate demand in crude oil production regions. We also benefited from higher storage and other ancillary service fees along our pipeline system due to increased customer activity;
an increase in crude oil revenue of $79.5 million primarily due to revenues from our condensate splitter at Corpus Christi that began commercial operations in June 2017, as well as more spot shipments on the Longhorn pipeline due to the favorable pricing differential between the Permian Basin and Houston which resulted in more volume at a higher average rate. Overall, the average crude rate per barrel decreased between periods due to significantly higher volumes on our Houston distribution system, which move at a lower rate; and
a decrease in marine storage revenue of $1.8 million primarily due to lower utilization resulting from the timing of maintenance work and the impact of tanks damaged by Hurricane Harvey.
Operating expenses increased by $33.0 million primarily resulting from:
an increase in refined products expenses of $6.8 million primarily due to higher personnel costs, which include a one-time pension correction, higher asset integrity spending and higher property taxes, partially offset by more favorable product overages;
an increase in crude oil expenses of $20.0 million primarily due to costs associated with our condensate splitter that began commercial operations in June 2017, fees we paid to Seabrook for contract storage and ancillary services that we utilized to provide services to our shippers, higher power costs associated with increased pipeline movements and higher personnel costs resulting from higher incentive compensation accrual as well as a one-time pension correction; and
an increase in marine storage expenses of $7.0 million primarily due to higher personnel costs mainly resulting from higher incentive compensation accrual as well as a one-time pension correction, combined with demolition costs incurred in connection with the expansion of our Galena Park, Texas dock facilities in 2018.
Product margin decreased $28.9 million primarily due to lower butane blending volumes and higher butane costs, resulting in lower butane blending margins.
Earnings of non-controlled entities increased $52.6 million primarily due to increased earnings from BridgeTex attributable to incremental shipments related to new commitments that began in 2018 for recently added pipeline capacity and increased spot shipments. Earnings from Saddlehorn were higher primarily due to a contractual step-up in committed shipments beginning September 2017. Earnings from Powder Springs and Double Eagle Pipeline LLC (“Double Eagle”) were also higher, and completed construction of additional storage contributed to higher earnings from Seabrook.
Depreciation and amortization expense increased $15.6 million primarily due to the commencement of expansion capital projects recently placed into service.
G&A expense increased $26.3 million primarily due to higher personnel costs resulting from an increase in employee headcount as a result of the growth of our business and higher incentive compensation expense due to company performance in 2018, as well as an increase from a one-time pension correction.
Interest expense, net of interest income and interest capitalized, increased $10.6 million in 2018 primarily due to higher outstanding debt in the current period. Our average outstanding debt increased from $4.2 billion in 2017 to $4.6 billion in 2018 primarily due to borrowings for expansion capital expenditures. Our weighted-average interest rate of 4.7% in 2018 was comparable to 2017.

38




Gain on sale of asset was $335.3 million favorable. We recognized a $353.8 million gain on the sale of a portion of our interest in BridgeTex in 2018. In 2017, we recognized an $18.5 million gain in connection with the sale of an inactive terminal along our refined products pipeline system.
Other expense was $6.6 million unfavorable primarily due to a one-time pension correction in 2018 and less favorable valuation adjustments associated with our crude oil tank bottoms, partially offset by a payment received in second quarter 2018 related to a 2016 asset transfer.
Provision for income taxes was $0.9 million unfavorable primarily due to higher earnings in the current period.


Distributable Cash Flow

We calculate the non-GAAP measures of distributable cash flow (“DCF”) and adjusted EBITDA in the table below. Management uses DCF as a basis for recommending to our general partner’s board of directors the amount of cash distributions to be paid to our limited partners each period. Management also uses DCF as a basis for determining the payouts for the performance-based awards issued under our equity-based compensation plan. Adjusted EBITDA is an important measure that we and the investment community use to assess the financial results of an entity. We believe that investors benefit from having access to the same financial measures utilized by management for these evaluations. A reconciliation of DCF and adjusted EBITDA for the nine months ended September 30, 2017 and 2018 to net income, which is its nearest comparable GAAP financial measure, follows (in millions):
 
 
Nine Months Ended September 30,
 
Increase (Decrease)
 
 
2017
 
2018
 
Net income
 
$
631.6

 
$
1,019.9

 
$
388.3

Interest expense, net
 
143.1

 
153.7

 
10.6

Depreciation and amortization
 
146.1

 
161.7

 
15.6

Equity-based incentive compensation(1)
 
0.3

 
15.3

 
15.0

Loss on sale and retirement of assets
 
7.6

 
6.3

 
(1.3
)
Gain on sale of asset(2)
 
(18.5
)
 
(351.2
)
 
(332.7
)
Commodity-related adjustments:
 
 
 
 
 
 
Derivative losses recognized in the period associated with future product transactions(3)
 
13.5

 
33.9

 
20.4

Derivative losses recognized in previous periods associated with product sales completed in the period(3)
 
(25.5
)
 
(38.9
)
 
(13.4
)
Inventory valuation adjustments(4)
 
4.0

 
0.2

 
(3.8
)
Total commodity-related adjustments
 
(8.0
)
 
(4.8
)
 
3.2

Distributions from operations of non-controlled entities in excess of earnings
 
19.5

 
17.1

 
(2.4
)
Other(5)
 
3.8

 
3.7

 
(0.1
)
Adjusted EBITDA
 
925.5

 
1,021.7

 
96.2

Interest expense, net, excluding debt issuance cost amortization
 
(140.6
)
 
(151.3
)
 
(10.7
)
Maintenance capital(6)
 
(71.8
)
 
(63.1
)
 
8.7

DCF
 
$
713.1

 
$
807.3

 
$
94.2

 
 
 
 
 
 
 
(1)
Because we intend to satisfy vesting of unit awards under our equity-based incentive compensation plan with the issuance of limited partner units, expenses related to this plan generally are deemed non-cash and added back for DCF purposes. The equity-based compensation adjustment for the nine months ended September 30, 2017 and 2018 was $14.2 million and $24.6 million, respectively.

39




However, the figures above include adjustments of $13.9 million and $9.3 million, respectively, for cash payments associated with our equity-based incentive compensation plan, which primarily include tax withholdings.
(2)
In September 2018, we recognized a $353.8 million gain from the sale of a portion of our interest in BridgeTex, of which $351.2 million has been deducted from the calculation of DCF, as it is not related to our ongoing operations. The remaining $2.6 million represents a purchase price adjustment related to September operations and, as such, is included in DCF.
In September 2017, we recognized an $18.5 million gain in connection with the sale of an inactive terminal along our refined products pipeline system, which has been deducted from the calculation of DCF because it is not related to our ongoing operations.
(3) Certain derivatives we use as economic hedges have not been designated as hedges for accounting purposes and the mark-to-market changes of these derivatives are recognized currently in net income. We exclude the net impact of these hedges from our determination of DCF until the related products are physically sold. In the period in which these hedged products are physically sold, the net impact of the associated hedges is included in our determination of DCF.
(4)
We adjust DCF for lower of average cost or net realizable value adjustments related to inventory and firm purchase commitments as well as market valuation of short positions recognized each period as these are non-cash items. In subsequent periods when we physically sell or purchase the related products, we adjust DCF for the valuation adjustments previously recognized.
(5)
Other adjustments in 2018 include a $3.6 million one-time adjustment recorded to partners’ capital as required by our adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers. The amount represents cash that we had previously received for deficiency payments, but did not yet recognize in net income under the previous revenue recognition standard. Other adjustments in 2017 are comprised of payments received from HollyFrontier Corporation in conjunction with the February 2016 Osage Pipe Line Company, LLC ("Osage") exchange transaction. These payments replaced distributions we would have received had the Osage transaction not occurred and are, therefore, included in our calculation of DCF.
(6)
Maintenance capital expenditures maintain our existing assets and do not generate incremental DCF (i.e. incremental returns to our unitholders). For this reason, we deduct maintenance capital expenditures to determine DCF.


Liquidity and Capital Resources

Cash Flows and Capital Expenditures

Operating Activities. Operating cash flows consist of net income adjusted for certain non-cash items and changes in certain assets and liabilities.
Net cash provided by operating activities was $813.7 million and $863.8 million for the nine months ended September 30, 2017 and 2018, respectively. The $50.1 million increase in 2018 was due to higher net income as previously described, partially offset by adjustments for non-cash items and changes in our working capital.
Investing Activities. Investing cash flows consist primarily of capital expenditures and investments in non-controlled entities.
Net cash used by investing activities for the nine months ended September 30, 2017 was $435.3 million and net cash provided by investing activities for the nine months ended September 30, 2018 was $101.4 million. During the 2018 period, we sold a portion of our interest in BridgeTex for cash proceeds of $578.5 million. Also during the 2018 period, we incurred $375.6 million for capital expenditures, which included $63.1 million for maintenance capital, $276.1 million for our expansion capital projects and $36.4 million for undivided joint interest projects for which cash was received from a third party. Additionally, we contributed capital of $147.0 million in conjunction with our joint venture capital projects, which we account for as investments in non-controlled entities. During the 2017 period, we incurred $443.4 million for capital expenditures, which included $71.8 million for maintenance capital and $371.6 million for expansion capital, and we contributed capital of $114.1 million in conjunction with our joint venture capital projects.
Financing Activities. Financing cash flows consist primarily of distributions to our unitholders and borrowings and repayments under our commercial paper program.
Net cash used by financing activities for the nine months ended September 30, 2017 and 2018 was $391.7 million and $881.1 million, respectively. During the 2018 period, we paid cash distributions of $642.4 million to our unitholders and repaid our $250.0 million of 6.40% notes due 2018. Also, in January 2018, our equity-based incentive compensation awards that vested December 31, 2017 were settled by issuing 168,913 limited partner units and distributing those units to the long-term incentive plan (“LTIP”) participants, resulting in payments primarily

40




associated with tax withholdings of $9.3 million. During the 2017 period, we paid cash distributions of $596.9 million to our unitholders. Additionally, net commercial paper borrowings during the 2017 period were $219.0 million. Also, in January 2017, the cumulative amounts of our LTIP awards that vested December 31, 2016 were settled by issuing 216,679 limited partner units and distributing those units to the LTIP participants, resulting in payments primarily associated with tax withholdings of $13.9 million.
The quarterly distribution amount related to our third quarter 2018 financial results (to be paid in fourth quarter 2018) is $0.9775 per unit.  If we are able to meet management’s targeted distribution growth of 8% during 2018 and the number of outstanding limited partner units remains at 228.2 million, total cash distributions of approximately $885 million will be paid to our unitholders related to 2018 financial results. Management believes we will have sufficient cash flows to fund these distributions.

Capital Requirements

Our businesses require continual investments to maintain, upgrade or enhance existing operations and to ensure compliance with safety and environmental regulations. Capital spending consists primarily of:
Maintenance capital expenditures. These expenditures include costs required to maintain equipment reliability and safety and to address environmental or other regulatory requirements rather than to generate incremental DCF; and
Expansion capital expenditures. These expenditures are undertaken primarily to generate incremental DCF and include costs to acquire additional assets to grow our business and to expand or upgrade our existing facilities, which we refer to as organic growth projects. Organic growth projects include, for example, capital expenditures that increase storage or throughput volumes or develop pipeline connections to new supply sources.

For the nine months ended September 30, 2018, our maintenance capital spending was $63.1 million. For 2018, we expect to spend approximately $90 million on maintenance capital.

During the first nine months of 2018, we spent $276.1 million for our expansion capital projects and contributed $147.0 million for capital projects in conjunction with our joint ventures. Based on the progress of expansion projects already underway, including expansion of the western leg of our refined products pipeline system in Texas and our share of spending for the Permian Gulf Coast pipeline, we expect to spend approximately $800 million in 2018, $1.3 billion in 2019 and $400 million in 2020 to complete our current projects.
 
Liquidity

Cash generated from operations is our primary source of liquidity for funding debt service, maintenance capital expenditures and quarterly distributions to our unitholders. Additional liquidity for other purposes, such as expansion capital expenditures and debt repayments, is available through borrowings under our commercial paper program and revolving credit facility, as well as from other borrowings or issuances of debt or limited partner units (see Note 7 – Debt and Note 11 – Partners’ Capital and Distributions of the consolidated financial statements included in Item 1 of Part I of this report for detail of our borrowings and changes in partners’ capital). If capital markets do not permit us to issue additional debt and equity securities, our business may be adversely affected, and we may not be able to acquire additional assets and businesses, fund organic growth projects or continue paying cash distributions at the current level.


Off-Balance Sheet Arrangements

None.



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Environmental

Our operations are subject to federal, state and local environmental laws and regulations. We have accrued liabilities for estimated costs at our facilities and properties. We record liabilities when environmental costs are probable and can be reasonably estimated. The determination of amounts recorded for environmental liabilities involves significant judgments and assumptions by management. Due to the inherent uncertainties involved in determining environmental liabilities, it is reasonably possible that the actual amounts required to extinguish these liabilities could be materially different from those we have recognized.



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Other Items

FERC Policy Change. In March and July 2018, the FERC issued a revised policy statement and order on rehearing in which it expressed a general policy that it will no longer permit an income tax allowance to be included in the cost-of-service rates for interstate pipelines structured as pass-through entities.  The FERC also indicated that it will incorporate the effects of the revised policy statement in its review of the oil pipeline index level to be effective July 1, 2021.  We do not have cost-of-service rates that would be immediately impacted by this policy change.  The majority of our tariffs are at market-based or negotiated rates; however, approximately 40% of the shipments on our refined products pipeline system are regulated by the FERC through an indexing methodology. Further, some of our negotiated crude oil tariffs utilize the FERC indexing methodology as a basis for future tariff rate escalations subject to certain negotiated modifications. Depending on how the FERC incorporates its most recent tax policy statement into its next index review, to become effective in 2021, our ability to increase our index-based rates could be negatively impacted.   However, we believe the ultimate resolution of this matter will not have a material impact on our results of operation, financial position or cash flows. 

Longhorn Pipeline Contracts Renewal.  The initial term of our contracts for the Longhorn pipeline expired on September 30, 2018. All committed shippers have now either elected to extend their contracts under current terms for an additional two years or have executed new contracts with lower incentive tariff rates and terms up to 10 years, resulting in an average contract term of five years and a lower average tariff rate. We do not expect the reduced tariff to have a material impact on our results of operations, financial position or cash flows.

Commodity Derivative Agreements. Certain of the business activities in which we engage result in our owning various commodities, which exposes us to commodity price risk. We use forward physical commodity contracts and exchange-traded futures contracts to help manage this commodity price risk. We use forward physical contracts to purchase butane and sell refined products. We account for these forward physical contracts as normal purchase and sale contracts, using traditional accrual accounting.  We use futures contracts to hedge against changes in prices of petroleum products that we expect to sell or purchase in future periods. We use and account for those futures contracts that qualify for hedge accounting treatment as either cash flow or fair value hedges, and we use and account for those futures contracts that do not qualify for hedge accounting treatment as economic hedges.

As of September 30, 2018, our open derivative contracts and the impact of the derivatives we settled during the period were comprised of futures contracts used to hedge sales and purchases of refined products, crude oil and butane related to our tender deductions, product overages, butane blending and fractionation activities. These contracts were accounted for as economic hedges, with the change in fair value of contracts that hedge future sales recorded to product sales, and the change in fair value of contracts that hedge future purchases recorded to cost of product sales.

For further information regarding the quantities of refined products and crude oil hedged at September 30, 2018 and the fair value of open hedge contracts at that date, please see Item 3. Quantitative and Qualitative Disclosures about Market Risk.

The following tables provide a summary of the impacts of the mark-to-market gains and losses associated with these futures contracts on our results of operations for the respective periods presented (in millions): 
 
Nine Months Ended September 30, 2017
 
Product Sales Revenue
 
Cost of Product Sales
 
Operating Expense
 
Other Income
 
Net Impact on Net Income
Gains (losses) recorded on open futures contracts during the period
$
(31.6
)
 
$
17.2

 
$
0.7

 
$
2.4

 
$
(11.3
)
Gains recognized on settled futures contracts during the period
27.2

 
2.5

 

 

 
29.7

Net impact of futures contracts
$
(4.4
)
 
$
19.7

 
$
0.7

 
$
2.4

 
$
18.4



43




 
Nine Months Ended September 30, 2018
 
Product Sales Revenue
 
Cost of Product Sales
 
Operating Expense
 
Other Income
 
Net Impact on Net Income
Gains (losses) recorded on open futures contracts during the period
$
(51.7
)
 
$
20.8

 
$

 
$

 
$
(30.9
)
Losses recognized on settled futures contracts during the period
(18.4
)
 
(4.7
)
 

 

 
(23.1
)
Net impact of futures contracts
$
(70.1
)
 
$
16.1

 
$

 
$

 
$
(54.0
)
 
 
 
 
 
 
 
 
 
 

Related Party Transactions. See Note 13 – Related Party Transactions in Item 1 of Part I of this report for detail of our related party transactions.



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ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We may be exposed to market risk through changes in commodity prices and interest rates and have established policies to monitor and control these market risks. We use derivative agreements to help manage our exposure to commodity price and interest rate risks. 

Commodity Price Risk

Our commodity price risk primarily arises from our butane blending and fractionation activities, and from managing product overages associated with our refined products and crude oil pipelines. We use derivatives such as forward physical contracts and exchange-traded futures contracts to help us manage commodity price risk.

Forward physical contracts that qualify for and are elected as normal purchases and sales are accounted for using traditional accrual accounting. As of September 30, 2018, we had commitments under forward purchase and sale contracts as follows (in millions):
 
Total
 
2018
 
2019 - 2020
Forward purchase contracts – notional value
$
242.2

 
$
122.9

 
$
119.3

Forward purchase contracts – barrels
4.7

 
2.4

 
2.3

Forward sales contracts – notional value
$
61.6

 
$
46.2

 
$
15.4

Forward sales contracts – barrels
0.7

 
0.5

 
0.2

 
We also use exchange-traded futures contracts to hedge against changes in the price of petroleum products we expect to sell or purchase. Virtually all of our open contracts did not qualify for hedge accounting treatment under ASC 815, Derivatives and Hedging, and we accounted for these contracts as economic hedges, with changes in fair value recognized currently in earnings. The fair value of these open futures contracts, representing 5.4 million barrels of petroleum products we expect to sell and 1.7 million barrels of butane we expect to purchase, was a net liability of $32.1 million. With respect to these contracts, a $10.00 per barrel increase (decrease) in the prices of petroleum products we expect to sell would result in a $54.0 million decrease (increase) in our operating profit, while a $10.00 per barrel increase (decrease) in the price of butane we expect to purchase would result in $17.0 million increase (decrease) in our operating profit. These increases or decreases in operating profit would be substantially offset by higher or lower product sales revenue or cost of product sales when the physical sale or purchase of those products occurs. These contracts may be for the purchase or sale of products in markets different from those in which we are attempting to hedge our exposure, and the resulting hedges may not eliminate all price risks.

Interest Rate Risk

Our use of variable rate debt and any forecasted issuances of fixed rate debt expose us to interest rate risk.

We have entered into $200.0 million of interest rate derivatives to protect against the risk of variability of interest payments on debt we anticipate issuing in the future. The fair value of these contracts at September 30, 2018 was a net asset of $5.2 million. We account for these agreements as cash flow hedges. A 0.125% decrease in interest rates would result in a decrease in the fair value of this asset of approximately $4.8 million. A 0.125% increase in interest rates would result in an increase in the fair value of approximately $4.6 million.



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ITEM 4.
CONTROLS AND PROCEDURES

We performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in rule 13a-14(c) of the Securities Exchange Act) as of the end of the period covered by the date of this report. We performed this evaluation under the supervision and with the participation of our management, including our general partner’s Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our general partner’s Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and practices are effective in providing reasonable assurance that all required disclosures are included in the current report. Additionally, these disclosure controls and practices are effective in ensuring that information required to be disclosed is accumulated and communicated to our Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosures. There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act) during the quarter ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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Forward-Looking Statements

Certain matters discussed in this Quarterly Report on Form 10-Q include forward-looking statements within the meaning of the federal securities laws that discuss our expected future results based on current and pending business operations. Forward-looking statements can be identified by words such as “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “forecasts,” “goal,” “guidance,” “intends,” “may,” “might,” “plans,” “potential,” “projected,” “scheduled,” “should,” “will” and other similar expressions. Although we believe our forward-looking statements are based on reasonable assumptions, statements made regarding future results are not guarantees of future performance and are subject to numerous assumptions, uncertainties and risks that are difficult to predict. Therefore, actual outcomes and results may be materially different from the results stated or implied in such forward-looking statements included in this report.
 
The following are among the important factors that could cause future results to differ materially from any projected, forecasted, estimated or budgeted amounts we have discussed in this report:
 
overall demand for refined products, crude oil, liquefied petroleum gases and ammonia in the U.S.;
price fluctuations for refined products, crude oil, liquefied petroleum gases and ammonia and expectations about future prices for these products;
changes in the production of crude oil in the basins served by our pipelines;
changes in general economic conditions, interest rates and price levels;
changes in the financial condition of our customers, vendors, derivatives counterparties, lenders or joint venture co-owners;
our ability to secure financing in the credit and capital markets in amounts and on terms that will allow us to execute our growth strategy, refinance our existing obligations when due and maintain adequate liquidity;
development of alternative energy sources, including but not limited to natural gas, solar power, wind power, electric and battery-powered engines and geothermal energy, increased use of biofuels such as ethanol and biodiesel, increased conservation or fuel efficiency, increased use of electric vehicles, as well as regulatory developments or other trends that could affect demand for our services;
population decreases in the markets served by our refined products pipeline system and changes in consumer preferences, driving patterns or rates of automobile ownership;
changes in the throughput or interruption in service of refined products or crude oil pipelines owned and operated by third parties and connected to our assets;
changes in demand for storage in our refined products, crude oil or marine terminals;
changes in supply and demand patterns for our facilities due to geopolitical events, the activities of the Organization of the Petroleum Exporting Countries, changes in U.S. trade policies or in laws governing the importing and exporting of petroleum products, technological developments or other factors;
our ability to manage interest rate and commodity price exposures;
changes in our tariff rates or other terms of service implemented by the FERC, the U.S. Surface Transportation Board or state regulatory agencies;
shut-downs or cutbacks at refineries, oil wells, petrochemical plants, ammonia production facilities or other customers or businesses that use or supply our services;
the effect of weather patterns and other natural phenomena, including climate change, on our operations and demand for our services;
an increase in the competition our operations encounter;
the occurrence of natural disasters, terrorism, sabotage, protests or activism, operational hazards, equipment failures, system failures or unforeseen interruptions;
our ability to obtain adequate levels of insurance at a reasonable cost, and the potential for losses to exceed the insurance coverage we do obtain;
the treatment of us as a corporation for federal or state income tax purposes or if we become subject to significant forms of other taxation or more aggressive enforcement or increased assessments under existing forms of taxation;

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our ability to identify expansion projects or to complete identified expansion projects on time and at projected costs;
our ability to make and integrate accretive acquisitions and joint ventures and successfully execute our business strategy;
uncertainty of estimates, including accruals and costs of environmental remediation;
our ability to cooperate with and rely on our joint venture co-owners;
actions by rating agencies concerning our credit ratings;
our ability to timely obtain and maintain all necessary approvals, consents and permits required to operate our existing assets and to construct, acquire and operate any new or modified assets;
our ability to promptly obtain all necessary services, materials, labor, supplies and rights-of-way required for construction of our growth projects, and to complete construction without significant delays, disputes or cost overruns;
risks inherent in the use and security of information systems in our business and implementation of new software and hardware;
changes in laws and regulations or the interpretations of such laws that govern our butane blending activities, including the potential applicability of the Carmack Amendment, which broadly covers claims for damage or loss incurred to goods transported by a carrier in interstate commerce, to such activities, or changes regarding product quality specifications or renewable fuel obligations that impact our ability to produce gasoline volumes through our butane blending activities or that require significant capital outlays for compliance;
changes in laws and regulations to which we or our customers are or could become subject, including tax withholding requirements, safety, security, employment, hydraulic fracturing, derivatives transactions, trade and environmental laws and regulations, including laws and regulations designed to address climate change;
the cost and effects of legal and administrative claims and proceedings against us, our subsidiaries or our joint ventures;
the amount of our indebtedness, which could make us vulnerable to general adverse economic and industry conditions, limit our ability to borrow additional funds, place us at competitive disadvantages compared to our competitors that have less debt or have other adverse consequences;
the effect of changes in accounting policies;
the potential that our internal controls may not be adequate, weaknesses may be discovered or remediation of any identified weaknesses may not be successful;
the ability and intent of our customers, vendors, lenders, joint venture co-owners or other third parties to perform on their contractual obligations to us;
petroleum product supply disruptions;
global and domestic repercussions from terrorist activities, including cyber attacks, and the government’s response thereto; and
other factors and uncertainties inherent in the transportation, storage and distribution of petroleum products and ammonia, and the operation, acquisition and construction of assets related to such activities.
 
This list of important factors is not exclusive. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changes in assumptions or otherwise.





48





PART II
OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS

Butane Blending Patent Infringement Proceeding.  On October 4, 2017, Sunoco Partners Marketing & Terminals L.P. (“Sunoco”) brought an action for patent infringement in the U.S. District Court for the District of Delaware alleging Magellan Midstream Partners, L.P. (“Magellan”) and Powder Springs Logistics, LLC (“Powder Springs”) have infringed patents relating to butane blending at the Powder Springs facility located in Powder Springs, Georgia. Sunoco has since submitted pleadings alleging that Magellan has also infringed various patents relating to butane blending at nine Magellan facilities, in addition to Powder Springs. Sunoco is seeking an undetermined amount of damages, attorneys’ fees and a permanent injunction enjoining Magellan and Powder Springs from infringing on the subject patents. We deny and are vigorously defending against all claims asserted by Sunoco. Although it is not possible to predict the ultimate outcome, we believe, based on our current understanding of the applicable facts and law, that the ultimate resolution of this matter will not have a material adverse impact on our results of operations, financial position or cash flows.

Hurricane Harvey Enforcement Proceeding. On July 10, 2018, we received a Notice of Enforcement letter from the Texas Commission on Environmental Quality alleging two air emission violations at our Galena Park, Texas terminal that occurred during Hurricane Harvey in third quarter 2017.  The penalties associated with these alleged violations could exceed $100,000. While the results cannot be predicted with certainty, we believe the ultimate resolution of this matter will not have a material impact on our results of operations, financial position or cash flows.

Clean Air Act Enforcement Proceeding.  In June 2017, we received an enforcement letter from the U.S. Department of Justice (“DOJ”) regarding a referral from the U.S. Environmental Protection Agency (“EPA”) relating to alleged Clean Air Act violations at our terminals in Mason City, Iowa, Great Bend and Kansas City, Kansas and Omaha, Nebraska.  In 2018, the DOJ and EPA notified us of their intent to impose penalties as a result of these alleged violations which could exceed $100,000.  We have been in active settlement discussions with the DOJ and EPA to settle these alleged violations on terms that are mutually agreeable.  While the results cannot be predicted with certainty, we believe the ultimate resolution of this matter will not have a material impact on our results of operations, financial position or cash flows.

U.S. Oil Recovery, EPA ID No.: TXN000607093 Superfund Site. We have liability at the U.S. Oil Recovery Superfund Site in Pasadena, Texas as a potential responsible party (“PRP”) under Section 107(a) of the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). As a result of the EPA’s Administrative Settlement Agreement and Order on Consent for Removal Action, filed August 25, 2011, EPA Region 6, CERCLA Docket No. 06-10-11, we voluntarily entered into the PRP group responsible for the site investigation, stabilization and subsequent site cleanup. We have paid approximately $42,000 associated with the assessment phase. Until this assessment phase has been completed, we cannot reasonably estimate our proportionate share of the remediation costs associated with this site.  While the results cannot be reasonably estimated, we believe the ultimate resolution of this matter will not have a material impact on our results of operations, financial position or cash flows.

Lake Calumet Cluster Site, EPA ID No.: ILD000716852 Superfund Site.  We have liability at the Lake Calumet Cluster Superfund Site in Chicago, Illinois as a PRP under Sections 107(a) and 113(f)(1) of CERCLA.  As a result of the EPA’s Administrative Settlement Agreement and Order for Remedial Investigation/Feasibility Study of June 2013, we voluntarily entered into the PRP group responsible for the investigation, cleanup and installation of an appropriate clay cap over the site.  We have paid $8,000 associated with the Remedial Investigation/Feasibility Study and cleanup costs to date.  Our projected portion of the estimated cap installation is $55,000.  While the results cannot be predicted with certainty, we believe the ultimate resolution of this matter will not have a material impact on our results of operations, financial position or cash flows.

49





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 future results of operations, financial position or cash flows.  


ITEM 1A.
RISK FACTORS

In addition to the information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not our only risks. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also could materially adversely affect our business, financial condition or operating results.


ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.
 

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES

None.
 

ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5.
OTHER INFORMATION

None.


ITEM 6.
EXHIBITS

The exhibits listed below on the Index to Exhibits are filed or incorporated by reference as part of this report.




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INDEX TO EXHIBITS
 
 
 
Exhibit Number
 
Description
 
 
 
Membership Interest Purchase Agreement dated August 20, 2018 by and among Plains Pipeline, L.P., Magellan OLP, L.P. and Mapleleaf Midstream, LLC (filed as Exhibit 2.1 to Form 8-K filed August 24, 2018).
 
 
 
Ratio of earnings to fixed charges.
 
 
 
Certification of Michael N. Mears, principal executive officer.
 
 
 
Certification of Aaron L. Milford, principal financial officer.
 
 
Section 1350 Certification of Michael N. Mears, Chief Executive Officer.
 
 
 
Section 1350 Certification of Aaron L. Milford, Chief Financial Officer.
 
 
 
Exhibit 101.INS
XBRL Instance Document.
 
 
 
Exhibit 101.SCH
XBRL Taxonomy Extension Schema.
 
 
 
Exhibit 101.CAL
XBRL Taxonomy Extension Calculation Linkbase.
 
 
 
Exhibit 101.DEF
XBRL Taxonomy Extension Definition Linkbase.
 
 
 
Exhibit 101.LAB
XBRL Taxonomy Extension Label Linkbase.
 
 
 
Exhibit 101.PRE
XBRL Taxonomy Extension Presentation Linkbase.
 
 
 

_______________________

*Such exhibit has heretofore been filed with the Securities and Exchange Commission as part of the filing indicated and is incorporated herein by reference.


51





SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized in Tulsa, Oklahoma on November 1, 2018.
 
MAGELLAN MIDSTREAM PARTNERS, L.P.
 
 
 
By:
 
Magellan GP, LLC,
 
 
its general partner
 
 
 
/s/ Aaron L. Milford
Aaron L. Milford
Chief Financial Officer
(Principal Accounting and Financial Officer)



52