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Magellan Midstream Partners, L.P. - Quarter Report: 2019 September (Form 10-Q)




 
 
 
 
 
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.
 
 
 
 
 





TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
 
ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS
 
 
 
 
 
 
CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
 
 
1.
 
 
2.
 
 
3.
 
 
4.
 
 
5.
 
 
6.
 
 
7.
 
Leases
 
8.
 
 
9.
 
 
10.
 
 
11.
 
 
12.
 
 
13.
 
 
14.
 
 
15.
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
 
 
 
 
 
 
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4.
CONTROLS AND PROCEDURES
PART II
OTHER INFORMATION
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 3.
ITEM 4.
ITEM 5.
ITEM 6.
INDEX TO EXHIBITS
SIGNATURES
 

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,
 
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




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




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




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.

5




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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

6




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.

7






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


8






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.



9






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.


10






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.

11






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, 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.


12






MAGELLAN MIDSTREAM PARTNERS, L.P.
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.


13






MAGELLAN MIDSTREAM PARTNERS, L.P.
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

 

14






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 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

 
 
 
 
 
 
 
 
 
 

15






MAGELLAN MIDSTREAM PARTNERS, L.P.
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.


16






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

 
$



17






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.


18






MAGELLAN MIDSTREAM PARTNERS, L.P.
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.

19






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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MAGELLAN MIDSTREAM PARTNERS, L.P.
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





21






MAGELLAN MIDSTREAM PARTNERS, L.P.
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.



23






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

25






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):

26






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
)


27






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.

28






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