UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 ________________________________________

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Units representing limited partnership units		MMP		New York Stock Exchange

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 30, 2019, there were 228,403,428 outstanding common units representing limited partner units of Magellan Midstream Partners, L.P.

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TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

 

ITEM 1.			CONSOLIDATED FINANCIAL STATEMENTS
	CONSOLIDATED STATEMENTS OF INCOME			2
	CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME			3
	CONSOLIDATED BALANCE SHEETS			4
	CONSOLIDATED STATEMENTS OF CASH FLOWS			5
	CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL			6
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
	1.		Organization, Description of Business and Basis of Presentation	8
	2.		Revenue from Contracts with Customers	10
	3.		Segment Disclosures	14
	4.		Investments in Non-Controlled Entities	16
	5.		Inventory	18
	6.		Employee Benefit Plans	18
	7.		Leases	20
	8.		Debt	24
	9.		Derivative Financial Instruments	25
	10.		Commitments and Contingencies	29
	11.		Long-Term Incentive Plan	30
	12.		Partners’ Capital and Distributions	31
	13.		Fair Value	32
	14.		Related Party Transactions	34
	15.		Subsequent Events	35
ITEM 2.			MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Introduction			36
	Recent Developments			36
	Results of Operations			37
	Distributable Cash Flow			44
	Liquidity and Capital Resources			45
	Off-Balance Sheet Arrangements			46
	Environmental			47
	Other Items			48
ITEM 3.			QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	50
ITEM 4.			CONTROLS AND PROCEDURES	51
Forward-Looking Statements				52
PART II OTHER INFORMATION
ITEM 1.			LEGAL PROCEEDINGS	54
ITEM 1A.			RISK FACTORS	55
ITEM 2.			UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	55
ITEM 3.			DEFAULTS UPON SENIOR SECURITIES	55
ITEM 4.			MINE SAFETY DISCLOSURES	55
ITEM 5.			OTHER INFORMATION	55
ITEM 6.			EXHIBITS	55
INDEX TO EXHIBITS				56
SIGNATURES				57

 

1

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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,
	2018				2019				2018				2019
Transportation and terminals revenue	$	488,775			$	506,432			$	1,392,960			$	1,473,629
Product sales revenue	144,403				144,807				552,792				497,791
Affiliate management fee revenue	4,842				5,357				15,138				15,810
Total revenue	638,020				656,596				1,960,890				1,987,230
Costs and expenses:
Operating	172,115				169,387				475,256				484,341
Cost of product sales	120,510				108,757				473,781				430,727
Depreciation, amortization and impairment	56,228				56,627				161,726				181,028
General and administrative	47,389				51,156				147,235				149,534
Total costs and expenses	396,242				385,927				1,257,998				1,245,630
Other operating income (expense)	—				(379		)		—				1,538
Earnings of non-controlled entities	53,795				50,189				130,843				122,229
Operating profit	295,573				320,479				833,735				865,367
Interest expense	55,133				53,750				168,535				165,322
Interest capitalized	(3,099		)		(5,831		)		(13,354		)		(14,419		)
Interest income	(501		)		(648		)		(1,460		)		(2,646		)
Gain on disposition of assets	(353,797		)		(2,532		)		(353,797		)		(28,966		)
Other (income) expense	1,694				2,602				10,299				9,222
Income before provision for income taxes	596,143				273,138				1,023,512				736,854
Provision for income taxes	1,609				100				3,659				2,450
Net income	$	594,534			$	273,038			$	1,019,853			$	734,404
Basic net income per limited partner unit	$	2.60			$	1.19			$	4.47			$	3.21
Diluted net income per limited partner unit	$	2.60			$	1.19			$	4.46			$	3.21
Weighted average number of limited partner units outstanding used for basic net income per unit calculation	228,397				228,720				228,368				228,642
Weighted average number of limited partner units outstanding used for diluted net income per unit calculation	228,449				228,754				228,412				228,667

    

See notes to consolidated financial statements.

2

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MAGELLAN MIDSTREAM PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, in thousands)

 

	Three Months Ended September 30,								Nine Months Ended September 30,
	2018				2019				2018				2019
Net income	$	594,534			$	273,038			$	1,019,853			$	734,404
Other comprehensive income (loss):
Derivative activity:
Net gain (loss) on cash flow hedges	6,852				(14,181		)		13,963				(25,216		)
Reclassification of net loss on cash flow hedges to income	740				699				2,219				1,927
Changes in employee benefit plan assets and benefit obligations recognized in other comprehensive income:
Net actuarial loss	—				—				(5,291		)		(10,913		)
Amortization of prior service credit	(45		)		(46		)		(136		)		(136		)
Amortization of actuarial loss	1,806				1,412				8,623				4,385
Settlement cost	—				439				—				2,499
Total other comprehensive income (loss)	9,353				(11,677		)		19,378				(27,454		)
Comprehensive income	$	603,887			$	261,361			$	1,039,231			$	706,950

See notes to consolidated financial statements.

3

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MAGELLAN MIDSTREAM PARTNERS, L.P.

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

	December 31, 2018				September 30, 2019
ASSETS					(Unaudited)
Current assets:
Cash and cash equivalents	$	218,283			$	135,486
Trade accounts receivable	104,164				131,746
Other accounts receivable	25,007				22,379
Inventory	185,735				205,952
Energy commodity derivatives contracts, net	55,011				4,839
Energy commodity derivatives deposits	—				21,811
Other current assets	58,143				45,631
Total current assets	646,343				567,844
Property, plant and equipment	7,628,592				8,248,181
Less: accumulated depreciation	1,830,411				1,983,694
Net property, plant and equipment	5,798,181				6,264,487
Investments in non-controlled entities	1,076,306				1,206,040
Right-of-use asset, operating leases	—				162,463
Long-term receivables	20,844				20,789
Goodwill	53,260				53,260
Other intangibles (less accumulated amortization of $2,979 and $5,588 at December 31, 2018 and September 30, 2019, respectively)	51,174				48,565
Restricted cash	90,978				56,006
Other noncurrent assets	10,451				12,732
Total assets	$	7,747,537			$	8,392,186
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable	$	138,735			$	205,410
Accrued payroll and benefits	70,276				56,677
Accrued interest payable	63,258				48,198
Accrued taxes other than income	53,093				63,375
Environmental liabilities	9,153				7,752
Deferred revenue	121,085				107,852
Accrued product liabilities	75,482				108,884
Energy commodity derivatives deposits	37,328				—
Current portion of operating lease liability	—				22,997
Current portion of long-term debt, net	59,489				—
Other current liabilities	48,657				59,500
Total current liabilities	676,556				680,645
Long-term operating lease liability	—				135,689
Long-term debt, net	4,211,380				4,705,775
Long-term pension and benefits	122,580				131,676
Other noncurrent liabilities	82,240				55,085
Environmental liabilities	11,347				8,860
Commitments and contingencies
Partners’ capital:
Limited partner unitholders (228,195 units and 228,403 units outstanding at December 31, 2018 and September 30, 2019, respectively)	2,763,925				2,822,401
Accumulated other comprehensive loss	(120,491		)		(147,945		)
Total partners’ capital	2,643,434				2,674,456
Total liabilities and partners’ capital	$	7,747,537			$	8,392,186

See notes to consolidated financial statements.

4

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MAGELLAN MIDSTREAM PARTNERS, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	Nine Months Ended
	September 30,
	2018				2019
Operating Activities:
Net income	$	1,019,853			$	734,404
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and impairment expense	161,726				181,028
Gain on sale and retirement of assets	(347,541		)		(29,227		)
Earnings of non-controlled entities	(130,843		)		(122,229		)
Distributions from operations of non-controlled entities	147,950				138,140
Equity-based incentive compensation expense	24,612				22,577
Settlement cost, amortization of prior service credit and actuarial loss	8,487				6,748
Debt prepayment costs	—				8,270
Changes in operating assets and liabilities:
Trade accounts receivable and other accounts receivable	(8,303		)		(24,954		)
Inventory	2,979				(20,217		)
Accounts payable	27,498				29,014
Accrued payroll and benefits	(2,976		)		(13,599		)
Accrued interest payable	(21,348		)		(15,060		)
Accrued taxes other than income	964				10,282
Accrued product liabilities	(15,964		)		33,402
Deferred revenue	5,353				(13,233		)
Other current and noncurrent assets and liabilities	(8,666		)		(2,749		)
Net cash provided by operating activities	863,781				922,597
Investing Activities:
Additions to property, plant and equipment, net(1)	(374,320		)		(718,605		)
Proceeds from sale and disposition of assets	579,448				65,574
Investments in non-controlled entities	(147,048		)		(158,145		)
Distributions from returns of investments in non-controlled entities	1,786				7,500
Deposits received from undivided joint interest third party	41,571				68,928
Net cash provided (used) by investing activities	101,437				(734,748		)
Financing Activities:
Distributions paid	(642,370		)		(688,635		)
Borrowings under long-term notes	—				996,405
Payments on notes	(250,000		)		(550,000		)
Debt placement costs	(326		)		(12,012		)
Net receipt (payment) on financial derivatives	20,925				(33,342		)
Payments associated with settlement of equity-based incentive compensation	(9,285		)		(9,764		)
Debt prepayment costs	—				(8,270		)
Net cash used by financing activities	(881,056		)		(305,618		)
Change in cash, cash equivalents and restricted cash	84,162				(117,769		)
Cash, cash equivalents and restricted cash at beginning of period	176,068				309,261
Cash, cash equivalents and restricted cash at end of period	$	260,230			$	191,492
Supplemental non-cash investing activities:
(1)   Additions to property, plant and equipment	$	(375,599	)		$	(775,109	)
Changes in accounts payable and other current liabilities related to capital expenditures	1,279				56,504
Additions to property, plant and equipment, net	$	(374,320	)		$	(718,605	)

See notes to consolidated financial statements.

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MAGELLAN MIDSTREAM PARTNERS, L.P.

CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL

(Unaudited, in thousands)

		Limited Partners				Accumulated Other Comprehensive Loss						Total Partners’ Capital
Balance, July 1, 2018		$	2,281,845				$	(127,553	)			$	2,154,292
Comprehensive income:
Net income		594,534					—					594,534
Total other comprehensive income		—					9,353					9,353
Total comprehensive income		594,534					9,353					603,887
Distributions		(218,497		)			—					(218,497		)
Equity-based incentive compensation expense		7,933					—					7,933
Other		(195		)			—					(195		)
Three Months Ended September 30, 2018		$	2,665,620				$	(118,200	)			$	2,547,420
Balance, July 1, 2019		$	2,774,047				$	(136,268	)			$	2,637,779
Comprehensive income:
Net income		273,038					—					273,038
Total other comprehensive loss		—					(11,677		)			(11,677		)
Total comprehensive income		273,038					(11,677		)			261,361
Distributions		(231,258		)			—					(231,258		)
Equity-based incentive compensation expense		6,773					—					6,773
Other		(199		)			—					(199		)
Three Months Ended September 30, 2019		$	2,822,401				$	(147,945	)			$	2,674,456

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MAGELLAN MIDSTREAM PARTNERS, L.P. CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL (Continued) (Unaudited, in thousands)
		Limited Partners				Accumulated Other Comprehensive Loss						Total Partners’ Capital
Balance, January 1, 2018		$	2,267,231				$	(137,578	)			$	2,129,653
Comprehensive income:
Net income		1,019,853					—					1,019,853
Total other comprehensive income		—					19,378					19,378
Total comprehensive income		1,019,853					19,378					1,039,231
Distributions		(642,370		)			—					(642,370		)
Equity-based incentive compensation expense		24,612					—					24,612
Issuance of limited partner units in settlement of equity-based incentive plan awards		120					—					120
Payments associated with settlement of equity-based incentive compensation		(9,285		)			—					(9,285		)
ASC 606 cumulative effect		5,975					—					5,975
Other		(516		)			—					(516		)
Nine Months Ended September 30, 2018		$	2,665,620				$	(118,200	)			$	2,547,420
Balance, January 1, 2019		$	2,763,925				$	(120,491	)			$	2,643,434
Comprehensive income:
Net income		734,404					—					734,404
Total other comprehensive loss		—					(27,454		)			(27,454		)
Total comprehensive income		734,404					(27,454		)			706,950
Distributions		(688,635		)			—					(688,635		)
Equity-based incentive compensation expense		22,577					—					22,577
Issuance of limited partner units in settlement of equity-based incentive plan awards		480					—					480
Payments associated with settlement of equity-based incentive compensation		(9,764		)			—					(9,764		)
Other		(586		)			—					(586		)
Nine Months Ended September 30, 2019		$	2,822,401				$	(147,945	)			$	2,674,456

See notes to consolidated financial statements.

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MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.	Organization, Description of Business and Basis of Presentation

Organization

Unless indicated otherwise, the terms “our,” “we,” “us” and similar language refer to Magellan Midstream Partners, L.P. together with its subsidiaries. Magellan Midstream Partners, L.P. is a Delaware limited partnership, and its limited partner units are traded on the New York Stock Exchange under the ticker symbol “MMP.” Magellan GP, LLC, a wholly-owned Delaware limited liability company, serves as its general partner.

Description of Business

We are principally engaged in the transportation, storage and distribution of refined petroleum products and crude oil.  As of September 30, 2019, our asset portfolio consisted of:

•	our refined products segment, comprised of our approximately 9,700-mile refined products pipeline system with 53 terminals as well as 25 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, a condensate splitter and 33 million barrels of aggregate storage capacity, of which approximately 21 million barrels are used for contract storage. Approximately 1,000 miles of these pipelines, the condensate splitter and 28 million barrels of this storage capacity (including 19 million barrels used for contract storage) are wholly-owned, with the remainder owned through joint ventures; and

•	our marine storage segment, consisting of six marine terminals located along coastal waterways with an aggregate storage capacity of approximately 27 million barrels. Five of these terminals and approximately 25 million barrels of this storage capacity are wholly-owned, with the remainder owned through joint ventures.

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, 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, which includes condensate, is used as feedstock by refineries, splitters and petrochemical facilities; and

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MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

•	biofuels, such as ethanol and biodiesel, are typically blended with other refined products as required by government mandates.

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, 2018, 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, 2019, the results of operations for the three and nine months ended September 30, 2018 and 2019 and cash flows for the nine months ended September 30, 2018 and 2019. The results of operations for the nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019 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 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, 2018.

Use of Estimates

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

New Accounting Pronouncements - Adopted by us on January 1, 2019

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. We adopted this standard on January 1, 2019, and it did not have a material impact on our consolidated statements of income or our leverage ratio as defined in our credit agreement. Adoption of this ASU resulted in an initial increase in our assets and liabilities by approximately $172 million due to the recognition of right-of-use assets and lease liabilities. See Note 7 – Leases for our lease disclosures.

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MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2.	Revenue from Contracts with Customers

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, Revenue from Contracts with Customers:
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 in 2018 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.

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MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

		Three Months Ended September 30, 2019
		Refined Products				Crude Oil				Marine Storage				Intersegment Eliminations				Total
Transportation		$	205,824			$	85,859			$	—			$	—			$	291,683
Terminalling		47,483				3,176				946				—				51,605
Storage		25,788				35,371				34,230				(1,556		)		93,833
Ancillary services		29,284				7,164				7,205				—				43,653
Lease revenue		2,103				19,356				4,199				—				25,658
Transportation and terminals revenue		310,482				150,926				46,580				(1,556		)		506,432
Product sales revenue		134,755				8,343				1,709				—				144,807
Affiliate management fee revenue		432				3,592				1,333				—				5,357
Total revenue		445,669				162,861				49,622				(1,556		)		656,596
Revenue not under the guidance of ASC 606, Revenue from Contracts with Customers:
Lease revenue(1)		(2,103		)		(19,356		)		(4,199		)		—				(25,658		)
(Gains) losses from futures contracts included in product sales revenue(2)		(17,061		)		(564		)		—				—				(17,625		)
Affiliate management fee revenue		(432		)		(3,592		)		(1,333		)		—				(5,357		)
Total revenue from contracts with customers under ASC 606		$	426,073			$	139,349			$	44,090			$	(1,556	)		$	607,956

⁽¹⁾ Lease revenue in 2019 is accounted for under ASC 842, Leases.

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

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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, Revenue from Contracts with Customers:
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 in 2018 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

		Nine Months Ended September 30, 2019
		Refined Products				Crude Oil				Marine Storage				Intersegment Eliminations				Total
Transportation		$	578,024			$	262,551			$	—			$	—			$	840,575
Terminalling		136,435				13,145				2,535				—				152,115
Storage		77,698				104,661				103,933				(3,835		)		282,457
Ancillary services		83,308				19,796				20,671				—				123,775
Lease revenue		8,237				53,950				12,520				—				74,707
Transportation and terminals revenue		883,702				454,103				139,659				(3,835		)		1,473,629
Product sales revenue		473,122				19,351				5,318				—				497,791
Affiliate management fee revenue		1,314				10,724				3,772				—				15,810
Total revenue		1,358,138				484,178				148,749				(3,835		)		1,987,230
Revenue not under the guidance of ASC 606, Revenue from Contracts with Customers:
Lease revenue(1)		(8,237		)		(53,950		)		(12,520		)		—				(74,707		)
Losses from futures contracts included in product sales revenue(2)		39,761				1,743				—				—				41,504
Affiliate management fee revenue		(1,314		)		(10,724		)		(3,772		)		—				(15,810		)
Total revenue from contracts with customers under ASC 606		$	1,388,348			$	421,247			$	132,457			$	(3,835	)		$	1,938,217

⁽¹⁾ Lease revenue in 2019 is accounted for under ASC 842, Leases.

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

Balance Sheet Disclosures

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

		December 31, 2018				September 30, 2019
Accounts receivable from contracts with customers		$	102,684			$	129,017
Contract assets		$	8,487			$	7,685
Contract liabilities		$	122,129			$	110,519

For the three and nine months ended September 30, 2019, we recognized $6.0 million and $90.0 million of transportation and terminals revenue that was recorded in deferred revenue as of December 31, 2018.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Unfulfilled Performance Obligations

The following table provides the aggregate amount of the transaction price allocated to our unfulfilled performance obligations (“UPOs”) as of September 30, 2019 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, 2019		$	2,034,378			$	1,206,147			$	223,219			$	3,463,744
Remaining terms		1 - 19 years				1 - 10 years				1 - 5 years
Estimated revenues from UPOs to be recognized in the next 12 months		$	289,478			$	337,928			$	122,047			$	749,453

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.

We believe that investors benefit from having access to the same financial measures used by management. Management evaluates performance based on segment operating margin. Operating margin, which is presented in the following tables, is an important measure used by management to evaluate the economic performance of our core operations. Operating margin is not a GAAP measure, but the components of operating margin are computed using amounts that are determined in accordance with GAAP. A reconciliation of operating margin to operating profit, which is its nearest comparable GAAP financial measure, is included in the tables below (presented in thousands). Operating profit includes depreciation, amortization and impairment expense and general and administrative (“G&A”) expense that management does not consider when evaluating the core profitability of our separate operating segments.

	Three Months Ended 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, amortization and impairment 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

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Three Months Ended September 30, 2019
	Refined Products				Crude Oil				Marine Storage				Intersegment Eliminations				Total
Transportation and terminals revenue	$	310,482			$	150,926			$	46,580			$	(1,556	)		$	506,432
Product sales revenue	134,755				8,343				1,709				—				144,807
Affiliate management fee revenue	432				3,592				1,333				—				5,357
Total revenue	445,669				162,861				49,622				(1,556		)		656,596
Operating expenses	111,839				42,529				17,921				(2,902		)		169,387
Cost of product sales	98,144				8,341				2,272				—				108,757
Other operating (income) expense	(1,046		)		3,629				(2,204		)		—				379
Earnings of non-controlled entities	(3,373		)		(46,047		)		(769		)		—				(50,189		)
Operating margin	240,105				154,409				32,402				1,346				428,262
Depreciation, amortization and impairment expense	31,752				14,810				8,719				1,346				56,627
G&A expense	30,650				13,666				6,840				—				51,156
Operating profit	$	177,703			$	125,933			$	16,843			$	—			$	320,479

	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, amortization and impairment 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

	Nine Months Ended September 30, 2019
	Refined Products				Crude Oil				Marine Storage				Intersegment Eliminations				Total
Transportation and terminals revenue	$	883,702			$	454,103			$	139,659			$	(3,835	)		$	1,473,629
Product sales revenue	473,122				19,351				5,318				—				497,791
Affiliate management fee revenue	1,314				10,724				3,772				—				15,810
Total revenue	1,358,138				484,178				148,749				(3,835		)		1,987,230
Operating expenses	317,328				123,569				51,404				(7,960		)		484,341
Cost of product sales	404,814				19,715				6,198				—				430,727
Other operating (income) expense	(2,398		)		8,112				(7,252		)		—				(1,538		)
(Earnings) losses of non-controlled entities	2,275				(122,084		)		(2,420		)		—				(122,229		)
Operating margin	636,119				454,866				100,819				4,125				1,195,929
Depreciation, amortization and impairment expense	102,024				45,812				29,067				4,125				181,028
G&A expense	89,385				40,378				19,771				—				149,534
Operating profit	$	444,710			$	368,676			$	51,981			$	—			$	865,367

4.	Investments in Non-Controlled Entities

Our investments in non-controlled entities at September 30, 2019 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%

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 receive 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 $0.9 million and $1.2 million during the three months ended September 30, 2018 and 2019, respectively, and $2.6 million and $3.8 million during the nine months ended September 30, 2018 and 2019, respectively.

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MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

		Three Months Ended September 30,								Nine Months Ended September 30,
		2018				2019				2018				2019
Transportation and terminals revenue:
BridgeTex, pipeline capacity and storage		$	9,958			$	10,737			$	29,519			$	31,063
Double Eagle, throughput revenue		$	1,005			$	1,582			$	3,892			$	4,813
Saddlehorn, storage revenue		$	552			$	566			$	1,628			$	1,669
Operating costs:
Seabrook, storage lease and ancillary services		$	3,982			$	6,267			$	3,982			$	19,417
Product sales revenue:
Powder Springs, butane sales		$	—			$	—			$	4,899			$	—
Cost of product sales:
Powder Springs, butane purchases		$	—			$	—			$	410			$	—
Other income:
MVP, easement sale		$	—			$	289			$	—			$	289

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

		December 31, 2018
		Trade Accounts Receivable				Other Accounts Receivable				Other Accounts Payable				Long-Term Receivables
BridgeTex		$	318			$	1,549			$	—			$	—
Double Eagle		$	546			$	—			$	—			$	—
MVP		$	—			$	397			$	—			$	—
Powder Springs		$	—			$	—			$	—			$	2,221
Saddlehorn		$	—			$	183			$	—			$	—
Seabrook		$	—			$	—			$	1,140			$	—

		September 30, 2019
		Trade Accounts Receivable				Other Accounts Receivable				Other Accounts Payable				Long-Term Receivables
BridgeTex		$	385			$	31			$	530			$	—
Double Eagle		$	440			$	—			$	—			$	—
HoustonLink		$	77			$	—			$	—			$	—
MVP		$	—			$	364			$	—			$	—
Powder Springs		$	—			$	10			$	—			$	4,892
Saddlehorn		$	—			$	120			$	—			$	—
Seabrook		$	753			$	332			$	1,223			$	—

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MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 12/31/2018		$	1,076,306
Additional investment		158,145
Indemnification settlement		(5,000		)
Earnings of non-controlled entities:
Proportionate share of earnings		123,621
Amortization of excess investment and capitalized interest		(1,392		)
Earnings of non-controlled entities		122,229
Less:
Distributions from operations of non-controlled entities		138,140
Distributions from returns of investments in non-controlled entities		7,500
Investments at 9/30/2019		$	1,206,040

5.	Inventory

Inventory at December 31, 2018 and September 30, 2019 was as follows (in thousands): 

	December 31, 2018				September 30, 2019
Refined products	$	92,751			$	106,406
Liquefied petroleum gases	46,612				47,057
Transmix	28,497				32,849
Crude oil	11,220				13,260
Additives	6,655				6,380
Total inventory	$	185,735			$	205,952

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 $2.7 million and $2.8 million for the three months ended September 30, 2018 and 2019, respectively, and $8.8 million and $9.3 million for the nine months ended September 30, 2018 and 2019, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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, 2018 and 2019 was as follows (in thousands):

 

	Three Months Ended								Three Months Ended
	September 30, 2018								September 30, 2019
	Pension Benefits				Other  Postretirement Benefits				Pension Benefits				Other  Postretirement Benefits
Components of net periodic benefit costs:
Service cost	$	6,424			$	58			$	6,260			$	48
Interest cost	2,816				104				3,026				126
Expected return on plan assets	(3,055		)		—				(2,354		)		—
Amortization of prior service credit	(45		)		—				(46		)		—
Amortization of actuarial loss	1,659				147				1,352				60
Settlement cost	—				—				439				—
Net periodic benefit cost	$	7,799			$	309			$	8,677			$	234

 

	Nine Months Ended								Nine Months Ended
	September 30, 2018								September 30, 2019
	Pension Benefits				Other  Postretirement Benefits				Pension Benefits				Other  Postretirement Benefits
Components of net periodic benefit costs:
Service cost	$	28,393			$	174			$	19,145			$	145
Interest cost	12,054				312				9,136				380
Expected return on plan assets	(9,057		)		—				(7,045		)		—
Amortization of prior service credit	(136		)		—				(136		)		—
Amortization of actuarial loss	8,182				441				4,137				248
Settlement cost	—				—				2,499				—
Net periodic benefit cost	$	39,436			$	927			$	27,736			$	773

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 (income) expense in our consolidated statements of income.

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MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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, 2018 and 2019 were as follows (in thousands):

		Three Months Ended								Three Months Ended
		September 30, 2018								September 30, 2019
Gains (Losses) Included in AOCL		Pension Benefits				Other Postretirement Benefits				Pension Benefits				Other Postretirement Benefits
Beginning balance		$	(96,352	)		$	(6,036	)		$	(93,876	)		$	(6,105	)
Amortization of prior service credit		(45		)		—				(46		)		—
Amortization of actuarial loss		1,659				147				1,352				60
Settlement cost		—				—				439				—
Ending balance		$	(94,738	)		$	(5,889	)		$	(92,131	)		$	(6,045	)

		Nine Months Ended								Nine Months Ended
		September 30, 2018								September 30, 2019
Gains (Losses) Included in AOCL		Pension Benefits				Other Postretirement Benefits				Pension Benefits				Other Postretirement Benefits
Beginning balance		$	(97,226	)		$	(6,597	)		$	(88,602	)		$	(5,409	)
Net actuarial gain (loss)		(5,558		)		267				(10,029		)		(884		)
Amortization of prior service credit		(136		)		—				(136		)		—
Amortization of actuarial loss		8,182				441				4,137				248
Settlement cost		—				—				2,499				—
Ending balance		$	(94,738	)		$	(5,889	)		$	(92,131	)		$	(6,045	)

Contributions estimated to be paid into the plans in 2019 are $31.6 million and $0.8 million for the pension plans and other postretirement benefit plan, respectively.

7.	Leases

As of January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842) using the modified retrospective method of adoption. We elected to use the transition option that allows us to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment, if any, to the opening balance of retained earnings in the year of adoption. Comparable periods continue to be presented under the guidance of the previous standard, ASC 840. ASC 842 requires lessees to recognize a lease liability and right-of-use asset on the balance sheet for operating leases. For lessors, the new accounting model remains largely the same, although some changes have been made to align it with the new lessee model and the new revenue recognition guidance, ASC 606, Revenue from Contracts with Customers. Our adoption of ASC 842 did not result in any material adjustments to retained earnings, changes in the timing or amounts of lease costs or changes to our leverage ratio as defined in our credit agreement.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We have both lessee and lessor arrangements. Our leases are evaluated at inception or at any subsequent modification. Depending on the terms, leases are classified as either operating or finance leases if we are the lessee, or as operating, sales-type or direct financing leases if we are the lessor, as appropriate under ASC 842.  Our lessee arrangements primarily include a terminalling and storage contract where we have exclusive use of dedicated tankage, leased pipelines and office buildings. Our lessor arrangements include pipeline capacity and storage contracts and our condensate splitter tolling agreement that qualify as operating leases under ASC 842. In addition, we have a long-term throughput and deficiency agreement with a customer that is being accounted for as a sales-type lease under ASC 842.

In accordance with ASC 842, we have made an accounting policy election to not apply the new standard to lessee arrangements with a term of one year or less and no purchase option that is reasonably certain of exercise. We will continue to account for these short-term arrangements by recognizing payments and expenses as incurred, without recording a lease liability and right-of-use asset.

We have also made an accounting policy election for both our lessee and lessor arrangements to combine lease and non-lease components. This election is applied to all of our lease arrangements as our non-lease components are not material and do not result in significant timing differences in the recognition of rental expenses or income.

Operating Leases – Lessee

We recognize a lease liability for each lease based on the present value of remaining minimum fixed rental payments (which includes payments under any renewal option that we are reasonably certain to exercise), using a discount rate that approximates the rate of interest we would have to pay to borrow on a collateralized basis over a similar term. We also recognize a right-of-use asset for each lease, valued at the lease liability, adjusted for prepaid or accrued rent balances existing at the time of initial recognition. The lease liability and right-of-use asset are reduced over the term of the lease as payments are made and the assets are used.

Related Party Operating Lease. In 2018, we entered into a long-term terminalling and storage contract with Seabrook for exclusive use of dedicated tankage that provides our customers with crude oil storage capacity and dock access for crude oil imports and exports on the Texas Gulf Coast.

Minimum fixed rental payments are recognized on a straight-line basis over the life of the lease as costs and expenses on our consolidated statements of income. Variable and short-term rental payments are recognized as costs and expenses as they are incurred. Variable payments consist of amounts that exceed the contractual minimum rental payment (for example, payment increases tied to a change in a market index). Future minimum rental payments under operating leases with initial terms greater than one year as of September 30, 2019 are as follows (in thousands):

	Third Party Leases				Seabrook Lease				All Leases
2019	$	2,643			$	2,607			$	5,250
2020	18,607				10,429				29,036
2021	18,994				8,973				27,967
2022	18,870				6,612				25,482
2023	18,349				6,612				24,961
Thereafter	34,086				37,473				71,559
Total future minimum rental payments	111,549				72,706				184,255
Present value discount	13,207				12,362				25,569
Total operating lease liability	$	98,342			$	60,344			$	158,686

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables provide further information about our operating leases (dollars in thousands):

		Three Months Ended September 30, 2019												Nine Months Ended September 30, 2019
		Third Party Leases				Seabrook Lease				All Leases				Third Party Leases				Seabrook Lease				All Leases
Fixed lease cost		$	4,792			$	2,608			$	7,400			$	14,375			$	7,951			$	22,326
Short-term lease cost		405				—				405				1,215				—				1,215
Variable lease cost		1,009				—				1,009				2,041				—				2,041
Total lease cost		$	6,206			$	2,608			$	8,814			$	17,631			$	7,951			$	25,582

		As of and for the Nine Months Ended September 30, 2019
		Third Party Leases				Seabrook Lease				All Leases
Current lease liability		$	14,925			$	8,072			$	22,997
Long-term lease liability		$	83,417			$	52,272			$	135,689
Right-of-use asset		$	102,119			$	60,344			$	162,463
Operating cash flows for operating leases		$	17,990			7,969				$	25,959
Weighted average remaining lease term (years)		6				9				7
Weighted-average discount rate		3.9%				4.3%				4.1%

Rent expense was $11.8 million and $30.3 million, respectively, for three and nine months ended September 30, 2018 and was recognized in accordance with ASC 840.

Operating Leases – Lessor

We recognize fixed rental income on a straight-line basis over the life of the lease as revenue on our consolidated statements of income. Variable rental payments are recognized as revenue in the period in which the circumstances on which the variable lease payments are based occur.

Future minimum payments receivable under operating leases with initial terms greater than one year as of September 30, 2019 are estimated as follows (in thousands):

2019	$	9,624
2020	36,614
2021	36,560
2022	23,855
2023	7,663
Thereafter	15,631
Total	$	129,947

 

We recognized variable lease revenue of $15.4 million and $43.3 million, respectively, for the three and nine months ended September 30, 2019, primarily related to our condensate splitter in Corpus Christi, Texas.

At September 30, 2019, property, plant and equipment utilized by our customers in operating lease arrangements consisted of: $224.1 million of processing equipment; $72.9 million of storage tanks; $49.2 million of pipeline and station equipment; and $29.9 million of other assets. The processing equipment primarily relates to our condensate splitter.

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MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Sales-Type Lease - Lessor

We entered into a long-term throughput and deficiency agreement with a customer on a pipeline and related assets that we constructed in Texas and New Mexico, which contains minimum payment commitments. Our customer has the option to purchase this pipeline and related assets at the end of the lease term for a nominal amount. This agreement was previously accounted for as a direct-financing lease under ASC 840 and is now being accounted for as a sales-type lease under ASC 842. The net investment under this arrangement as of December 31, 2018 and September 30, 2019 was as follows (in thousands):

		December 31, 2018				September 30, 2019
Total minimum lease payments receivable		$	17,468			$	16,158
Less: Unearned income		3,422				2,961
Recorded net investment in sales-type lease		$	14,046			$	13,197

The net investment in sales-type leases was classified in the consolidated balance sheets as follows (in thousands):

		December 31, 2018				September 30, 2019
Other accounts receivable		$	1,138			$	1,177
Long-term receivables		12,908				12,020
Total		$	14,046			$	13,197

Future minimum payments receivable under this lease are $0.4 million in 2019, $1.7 million in 2020, $1.7 million in 2021, $1.7 million in 2022, $1.7 million in 2023 and $8.7 million thereafter.

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MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8.	Debt

Long-term debt at December 31, 2018 and September 30, 2019 was as follows (in thousands):

		December 31, 2018				September 30, 2019
6.55% Notes due 2019		$	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
4.85% Notes due 2049		—				500,000
3.95% Notes due 2050		—				500,000
Face value of long-term debt		4,300,000				4,750,000
Unamortized debt issuance costs(1)		(27,070		)		(35,770		)
Net unamortized debt discount(1)		(2,927		)		(8,455		)
Net unamortized amount of gains from historical fair value hedges(1)		866				—
Long-term debt, net, including current portion		4,270,869				4,705,775
Less: Current portion of long-term debt, net		59,489				—
Long-term debt, net		$	4,211,380			$	4,705,775

(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.

2019 Debt Issuances

On August 19, 2019, we issued $500.0 million of 3.95% senior notes due 2050 in an underwritten public

offering. The notes were issued at 99.91% of par. Net proceeds from this offering were approximately $494.4 million after underwriting discounts and offering expenses. The net proceeds from this offering will be used for general partnership purposes, including expansion capital projects.

On January 18, 2019, we issued $500.0 million of 4.85% senior notes due 2049 in an underwritten public

offering. The notes were issued at 99.371% of par. Net proceeds from this offering were approximately $491.5 million after underwriting discounts and offering expenses. The net proceeds from this offering along with cash on hand were used to early redeem our $550.0 million of 6.55% senior notes due 2019 on February 11, 2019. In connection with this offering, we recognized $8.3 million of debt prepayment costs that were recorded as interest expense in our consolidated statements of income.

Other Debt

Revolving Credit Facilities. At September 30, 2019, the total borrowing capacity under our revolving credit facility maturing in May 2024 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

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MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

LIBOR plus a spread ranging from 0.875% to 1.500% based on our credit ratings. Additionally, an unused commitment fee is assessed at a rate between 0.075% and 0.200% depending on our credit ratings. The unused commitment fee was 0.125% at September 30, 2019. Borrowings under this facility may be used for general partnership purposes, including capital expenditures. As of December 31, 2018 and September 30, 2019, there were no borrowings outstanding under this facility, with $6.8 million and $3.5 million, respectively, 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.

We entered into a $500.0 million 364-day revolving credit facility, which matures in May 2020. Borrowings under this facility are unsecured and generally bear interest at LIBOR plus a spread ranging from 1.000% to 1.250% based on our credit ratings. Additionally, an unused commitment fee is assessed at a rate between 0.075% and 0.125%. The unused commitment fee was 0.100% at September 30, 2019. Borrowings under this facility may be used for general purposes, including capital expenditures. As of September 30, 2019, there were no borrowings outstanding under this facility.

Commercial Paper Program. We have a commercial paper program under which we may issue commercial paper notes in an amount up to the available capacity under our $1.0 billion revolving credit facility. The maturities 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 2.3% for the year ended December 31, 2018 and 2.7% for the nine months ended September 30, 2019.

9.	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. For interest rate cash flow hedges, we record the unrealized gains or losses as an adjustment to other comprehensive income. The realized gains and losses from our cash flow hedges are recognized into earnings as an adjustment to our periodic interest expense over the life of the related debt issuance. For fair value hedges on long-term debt, we record the unrealized gains or losses as an adjustment to long-term debt, and realized amounts as an adjustment to our periodic interest expense. Adjustments resulting from discontinued hedges continue to be recognized in accordance with their historic hedging relationships.

In third quarter 2019, upon issuance of our $500.0 million of 3.95% notes due 2050, we terminated and settled treasury lock agreements we had previously entered into to protect against the variability of interest payments on this anticipated debt issuance for a loss of $25.3 million, which was included in our statements of cash flows as a net payment on financial derivatives.  These agreements were accounted for as cash flow hedges. The loss was recorded to other comprehensive income (loss) and will be recognized into earnings as an adjustment to our periodic interest expense over the life of the associated notes.

In first quarter 2019, upon issuance of $500.0 million of 4.85% notes due 2049, we terminated and settled treasury lock agreements that we had previously entered into to protect against the variability of interest payments on this anticipated debt issuance for a loss of $8.0 million, which was included in our statements of cash flows as a net payment on financial derivatives. These agreements were accounted for as cash flow hedges. The loss was

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MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

recorded to other comprehensive income (loss) and will be recognized into earnings as an adjustment to our periodic interest expense over the life of the associated notes.

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. Forward physical commodity contracts subject to this exception are evaluated for the probability of future delivery and are periodically tested once the 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, 2019 were as follows:

Type of Contract/Accounting Methodology		Product Represented by the Contract and Associated Barrels		Maturity Dates
Futures - Economic Hedges		4.5 million barrels of refined products and crude oil		Between October 2019 and April 2020
Futures - Economic Hedges		1.5 million barrels of butane and natural gasoline		Between October 2019 and April 2020

Energy Commodity Derivatives Contracts and Deposits Offsets

At September 30, 2019, we had made margin deposits of $21.8 million for our future contracts with our counterparties, which were recorded as current assets under energy commodity derivatives deposits on our consolidated balance sheets. At December 31, 2018, we held margin deposits of $37.3 million for our future contracts with our counterparties, which were recorded as current liabilities under energy commodity derivatives deposits on our consolidated balance sheets. We have the right to offset the combined fair values of our open futures contracts against our margin deposits under a master netting arrangement for each counterparty; however, we have elected to present the combined fair values of our open futures contracts separately from the related margin deposits on our consolidated balance sheets. Additionally, we have the right to offset the fair values of our futures contracts together for each counterparty, which we have elected to do, and we report the combined net balances on our consolidated balance sheets. A schedule of the derivative amounts we have offset and the deposit amounts we could offset under a master netting arrangement are provided below as of December 31, 2018 and September 30, 2019 (in thousands):

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MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Description		Gross Amounts of Recognized Assets (Liabilities)				Gross Amounts of Assets (Liabilities) Offset in the Consolidated Balance Sheets				Net Amounts of Assets (Liabilities) Presented in the Consolidated Balance Sheets				Margin Deposit Amounts Not Offset in the Consolidated Balance Sheets				Net Asset Amount(1)
As of 12/31/2018		$	62,166			$	(7,155	)		$	55,011			$	(37,328	)		$	17,683
As of 9/30/2019		$	16,978			$	(12,139	)		$	4,839			$	21,811			$	26,650

(1)	Amount represents the maximum loss we would incur if all of our counterparties failed to perform on their derivative contracts.

Basis Derivative Agreement

 

During 2019, we entered into a basis derivative agreement with a joint venture co-owner’s affiliate, and, contemporaneously, that affiliate entered into an intrastate transportation services agreement with the joint venture. Settlements under the basis derivative agreement are determined based on the basis differential of crude oil prices at different market locations and a notional volume of 30,000 barrels per day. As a result, we account for this agreement as a derivative. The agreement will expire in early 2022. We recognize the changes in fair value of this agreement based on forward price curves for crude oil in West Texas and the Houston Gulf Coast in other operating income (expense) in our consolidated statements of income. The liability for this agreement at September 30, 2019 was $17.8 million.

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, 2018 and 2019 were as follows (in thousands):

 

	Three Months Ended								Nine Months Ended
	September 30,								September 30,
Derivative Losses Included in AOCL	2018				2019				2018				2019
Beginning balance	$	(25,165	)		$	(36,287	)		$	(33,755	)		$	(26,480	)
Net gain (loss) on cash flow hedges	6,852				(14,181		)		13,963				(25,216		)
Reclassification of net loss on cash flow hedges to income	740				699				2,219				1,927
Ending balance	$	(17,573	)		$	(49,769	)		$	(17,573	)		$	(49,769	)

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MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following is a summary of the effect on our consolidated statements of income for the three and nine months ended September 30, 2018 and 2019 of derivatives that were designated as cash flow hedges (in thousands):

		Interest Rate Contracts
		Amount of Gain (Loss) Recognized in AOCL on Derivatives				Location of Loss Reclassified from AOCL into  Income		Amount of Loss Reclassified from AOCL into Income
Three Months Ended September 30, 2018		$	6,852			Interest expense		$	(740	)

Three Months Ended September 30, 2019		$	(14,181	)		Interest expense		$	(699	)

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

Nine Months Ended September 30, 2019		$	(25,216	)		Interest expense		$	(1,927	)

As of September 30, 2019, the net loss estimated to be classified to interest expense over the next twelve months from AOCL is approximately $3.2 million. This amount relates to the amortization of losses on interest rate contracts over the life of the related debt instruments.

The following table provides a summary of the effect on our consolidated statements of income for the three and nine months ended September 30, 2018 and 2019 of derivatives that were not designated as hedging instruments (in thousands):

				Amount of Gain (Loss) Recognized on Derivatives
				Three Months Ended								Nine Months Ended
		Location of Gain (Loss) Recognized on Derivatives		September 30,								September 30,
Derivative Instrument				2018				2019				2018				2019
Futures contracts		Product sales revenue		$	(24,354	)		$	17,626			$	(70,140	)		$	(41,504	)
Futures contracts		Cost of product sales		11,665				(5,581		)		16,058				(9,456		)
Basis derivative agreement		Other operating income (expense)		—				(3,910		)		—				(8,869		)
		Total		$	(12,689	)		$	8,135			$	(54,082	)		$	(59,829	)

The impact of the derivatives in the above table was reflected as cash from operations on our consolidated statements of cash flows.

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MAGELLAN MIDSTREAM PARTNERS, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Balance Sheets

The following table provides 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, 2018 (in thousands). There were no balances outstanding at September 30, 2019.

December 31, 2018

Asset Derivatives

Liability Derivatives

Derivative Instrument

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Futures contracts

Energy commodity derivatives contracts, net

$

462

Energy commodity derivatives contracts, net

$

—

Interest rate contracts

Other current assets

312

Other current liabilities

8,438

Total

$

774

Total

$

8,438

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, 2018 and September 30, 2019 (in thousands):

December 31, 2018

Asset Derivatives

Liability Derivatives

Derivative Instrument

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Futures contracts

Energy commodity derivatives contracts, net

$

61,704

Energy commodity derivatives contracts, net

$

7,155

September 30, 2019

Asset Derivatives

Liability Derivatives

Derivative Instrument

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Futures contracts

Energy commodity derivatives contracts, net

$

16,978

Energy commodity derivatives contracts, net

$

12,139

Basis derivative agreement

Other current assets

—

Other current liabilities

8,957

Basis derivative agreement

Other noncurrent assets

—

Other noncurrent liabilities

8,798

Total