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Magellan Midstream Partners, L.P. - Quarter Report: 2019 June (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 June 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 July 31, 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2018
 
2019
 
2018
 
2019
Transportation and terminals revenue
$
472,248

 
$
506,405

 
$
904,185

 
$
967,197

Product sales revenue
166,797

 
189,989

 
408,389

 
352,984

Affiliate management fee revenue
5,046

 
5,305

 
10,296

 
10,453

Total revenue
644,091

 
701,699

 
1,322,870

 
1,330,634

Costs and expenses:
 
 
 
 
 
 
 
Operating
159,845

 
168,929

 
303,141

 
314,954

Cost of product sales
153,679

 
152,876

 
353,271

 
321,970

Depreciation, amortization and impairment
53,619

 
62,530

 
105,498

 
124,401

General and administrative
53,290

 
52,383

 
99,846

 
98,378

Total costs and expenses
420,433

 
436,718

 
861,756

 
859,703

Other operating income (expense)
—

 
(5,024
)
 
—

 
1,917

Earnings of non-controlled entities
42,510

 
40,785

 
77,048

 
72,040

Operating profit
266,168

 
300,742

 
538,162

 
544,888

Interest expense
56,750

 
51,406

 
113,402

 
111,572

Interest capitalized
(5,608
)
 
(5,134
)
 
(10,255
)
 
(8,588
)
Interest income
(380
)
 
(338
)
 
(959
)
 
(1,998
)
Gain on disposition of assets
—

 
(4,646
)
 
—

 
(26,434
)
Other (income) expense
(119
)
 
4,570

 
8,605

 
6,620

Income before provision for income taxes
215,525

 
254,884

 
427,369

 
463,716

Provision for income taxes
1,116

 
1,181

 
2,050

 
2,350

Net income
$
214,409

 
$
253,703

 
$
425,319

 
$
461,366

Basic net income per limited partner unit
$
0.94

 
$
1.11

 
$
1.86

 
$
2.02

Diluted net income per limited partner unit
$
0.94

 
$
1.11

 
$
1.86

 
$
2.02

Weighted average number of limited partner units outstanding used for basic net income per unit calculation
228,387

 
228,647

 
228,354

 
228,603

Weighted average number of limited partner units outstanding used for diluted net income per unit calculation
228,425

 
228,688

 
228,393

 
228,623


    



See notes to consolidated financial statements.

2



MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2019
 
2018
 
2019
Net income
$
214,409

 
$
253,703

 
$
425,319

 
$
461,366

Other comprehensive income (loss):
 
 

 
 
 

Derivative activity:
 
 
 
 
 
 
 
Net gain (loss) on cash flow hedges
1,697

 
(6,659
)
 
7,111

 
(11,035
)
Reclassification of net loss on cash flow hedges to income  
739

 
601

 
1,479

 
1,228

Changes in employee benefit plan assets and benefit obligations recognized in other comprehensive income:
 
 
 
 
 
 
 
Net actuarial gain (loss)
653

 
(10,913
)
 
(5,291
)
 
(10,913
)
Amortization of prior service credit
(46
)
 
(45
)
 
(91
)
 
(90
)
Amortization of actuarial loss
1,703

 
1,625

 
6,817

 
2,973

Settlement cost
—

 
2,060

 
—

 
2,060

Total other comprehensive income (loss)
4,746

 
(13,331
)
 
10,025

 
(15,777
)
Comprehensive income
$
219,155

 
$
240,372

 
$
435,344

 
$
445,589






























See notes to consolidated financial statements.

3



MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
 
December 31,
2018
 
June 30,
2019
ASSETS
 
 
(Unaudited)
Current assets:
 
 
 
Cash and cash equivalents
$
218,283

 
$
3,070

Trade accounts receivable
104,164

 
139,611

Other accounts receivable
25,007

 
25,317

Inventory
185,735

 
172,907

Energy commodity derivatives contracts, net
55,011

 
—

Energy commodity derivatives deposits
—

 
27,533

Other current assets
58,143

 
38,580

Total current assets
646,343

 
407,018

Property, plant and equipment
7,628,592

 
8,024,845

Less: accumulated depreciation
1,830,411

 
1,935,301

Net property, plant and equipment
5,798,181

 
6,089,544

Investments in non-controlled entities
1,076,306

 
1,165,028

Right-of-use asset, operating leases
—

 
167,456

Long-term receivables
20,844

 
21,304

Goodwill
53,260

 
53,260

Other intangibles (less accumulated amortization of $2,979 and $4,920 at December 31, 2018 and June 30, 2019, respectively)
51,174

 
49,233

Restricted cash
90,978

 
28,176

Other noncurrent assets
10,451

 
24,421

Total assets
$
7,747,537

 
$
8,005,440

 
 
 
 
LIABILITIES AND PARTNERS’ CAPITAL
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
138,735

 
$
179,734

Accrued payroll and benefits
70,276

 
47,396

Accrued interest payable
63,258

 
57,805

Accrued taxes other than income
53,093

 
48,148

Environmental liabilities
9,153

 
4,687

Deferred revenue
121,085

 
111,896

Accrued product liabilities
75,482

 
76,459

Energy commodity derivatives contracts, net
—

 
9,097

Energy commodity derivatives deposits
37,328

 
—

Current portion of operating lease liability
—

 
22,477

Current portion of long-term debt, net
59,489

 
—

Other current liabilities
48,657

 
60,572

Total current liabilities
676,556

 
618,271

Long-term operating lease liability
—

 
146,726

Long-term debt, net
4,211,380

 
4,407,793

Long-term pension and benefits
122,580

 
133,513

Other noncurrent liabilities
82,240

 
48,968

Environmental liabilities
11,347

 
12,390

Commitments and contingencies

 

Partners’ capital:
 
 
 
Limited partner unitholders (228,195 units and 228,403 units outstanding at December 31, 2018 and June 30, 2019, respectively)
2,763,925

 
2,774,047

Accumulated other comprehensive loss
(120,491
)
 
(136,268
)
Total partners’ capital
2,643,434

 
2,637,779

Total liabilities and partners’ capital
$
7,747,537

 
$
8,005,440

 
 
 
 

See notes to consolidated financial statements.

4



MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Six Months Ended
 
June 30,
 
2018
 
2019
Operating Activities:
 
 
 
Net income
$
425,319

 
$
461,366

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, amortization and impairment expense
105,498

 
124,401

Loss (gain) on sale and retirement of assets
4,586

 
(26,437
)
Earnings of non-controlled entities
(77,048
)
 
(72,040
)
Distributions from operations of non-controlled entities
94,661

 
83,069

Equity-based incentive compensation expense
16,679

 
15,804

Settlement cost, amortization of prior service credit and actuarial loss
6,726

 
4,943

Debt prepayment costs
—

 
8,270

Changes in operating assets and liabilities:
 
 
 
Trade accounts receivable and other accounts receivable
24,739

 
(35,757
)
Inventory
(1,233
)
 
12,828

Accounts payable
18,843

 
22,110

Accrued payroll and benefits
(11,070
)
 
(22,880
)
Accrued interest payable
(62
)
 
(5,453
)
Accrued taxes other than income
(10,199
)
 
(4,945
)
Accrued product liabilities
(32,142
)
 
977

Deferred revenue
4,240

 
(9,189
)
Other current and noncurrent assets and liabilities
(5,471
)
 
13,493

Net cash provided by operating activities
564,066

 
570,560

Investing Activities:
 
 
 
Additions to property, plant and equipment, net(1)
(219,442
)
 
(487,662
)
Proceeds from sale and disposition of assets
241

 
63,887

Investments in non-controlled entities
(144,859
)
 
(112,251
)
Distributions from returns of investments in non-controlled entities
—

 
7,500

Deposits received from undivided joint interest third party
41,571

 
26,352

Net cash used by investing activities
(322,489
)
 
(502,174
)
Financing Activities:
 
 
 
Distributions paid
(423,873
)
 
(457,377
)
Net commercial paper borrowings
119,896

 
197,000

Borrowings under long-term notes
—

 
496,855

Payments on notes
—

 
(550,000
)
Debt placement costs
(326
)
 
(6,817
)
Net payment on financial derivatives
—

 
(8,028
)
Payments associated with settlement of equity-based incentive compensation
(9,285
)
 
(9,764
)
Debt prepayment costs
—

 
(8,270
)
Net cash used by financing activities
(313,588
)
 
(346,401
)
Change in cash, cash equivalents and restricted cash
(72,011
)
 
(278,015
)
Cash, cash equivalents and restricted cash at beginning of period
176,068

 
309,261

Cash, cash equivalents and restricted cash at end of period
$
104,057

 
$
31,246

 
 
 
 
Supplemental non-cash investing activities:
 
 
 
(1)   Additions to property, plant and equipment
$
(219,828
)
 
$
(514,812
)
Changes in accounts payable and other current liabilities related to capital expenditures
386

 
27,150

Additions to property, plant and equipment, net
$
(219,442
)
 
$
(487,662
)




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, April 1, 2018
 
$
2,271,486

 
 
$
(132,299
)
 
 
$
2,139,187

Comprehensive income:
 
 
 
 
 
 
 
 
Net income
 
214,409

 
 
—

 
 
214,409

Total other comprehensive income
 
—

 
 
4,746

 
 
4,746

Total comprehensive income
 
214,409

 
 
4,746

 
 
219,155

Distributions
 
(213,933
)
 
 
—

 
 
(213,933
)
Equity-based incentive compensation expense
 
10,047

 
 
—

 
 
10,047

Other
 
(164
)
 
 
—

 
 
(164
)
Three Months Ended June 30, 2018
 
$
2,281,845

 
 
$
(127,553
)
 
 
$
2,154,292

 
 
 
 
 
 
 
 
 
Balance, April 1, 2019
 
$
2,739,192

 
 
$
(122,937
)
 
 
2,616,255

Comprehensive income:
 
 
 
 
 
 
 
 
Net income
 
253,703

 
 
—

 
 
253,703

Total other comprehensive loss
 
—

 
 
(13,331
)
 
 
(13,331
)
Total comprehensive income
 
253,703

 
 
(13,331
)
 
 
240,372

Distributions
 
(229,545
)
 
 
—

 
 
(229,545
)
Equity-based incentive compensation expense
 
10,890

 
 
—

 
 
10,890

Other
 
(193
)
 
 
—

 
 
(193
)
Three Months Ended June 30, 2019
 
$
2,774,047

 
 
$
(136,268
)
 
 
$
2,637,779

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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
 
425,319

 
 
—

 
 
425,319

Total other comprehensive income
 
—

 
 
10,025

 
 
10,025

Total comprehensive income
 
425,319

 
 
10,025

 
 
435,344

Distributions
 
(423,873
)
 
 
—

 
 
(423,873
)
Equity-based incentive compensation expense
 
16,679

 
 
—

 
 
16,679

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
 
(321
)
 
 
—

 
 
(321
)
Six Months Ended June 30, 2018
 
$
2,281,845

 
 
$
(127,553
)
 
 
$
2,154,292

 
 
 
 
 
 
 
 
 
Balance, January 1, 2019
 
$
2,763,925

 
 
$
(120,491
)
 
 
2,643,434

Comprehensive income:
 
 
 
 
 
 
 
 
Net income
 
461,366

 
 
—

 
 
461,366

Total other comprehensive loss
 
—

 
 
(15,777
)
 
 
(15,777
)
Total comprehensive income
 
461,366

 
 
(15,777
)
 
 
445,589

Distributions
 
(457,377
)
 
 
—

 
 
(457,377
)
Equity-based incentive compensation expense
 
15,804

 
 
—

 
 
15,804

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
 
(387
)
 
 
—

 
 
(387
)
Six Months Ended June 30, 2019
 
$
2,774,047

 
 
$
(136,268
)
 
 
$
2,637,779

 
 
 
 
 
 
 
 
 












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 June 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 June 30, 2019, the results of operations for the three and six months ended June 30, 2018 and 2019 and cash flows for the six months ended June 30, 2018 and 2019. The results of operations for the six months ended June 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 June 30, 2018
 
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment Eliminations
 
Total
Transportation
 
$
184,596

 
$
84,755

 
$
—

 
$
—

 
$
269,351

Terminalling
 
50,574

 
—

 
592

 
—

 
51,166

Storage
 
24,969

 
28,536

 
33,319

 
(915
)
 
85,909

Ancillary services
 
28,459

 
8,199

 
6,037

 
—

 
42,695

Lease revenue
 
2,466

 
16,463

 
4,198

 
—

 
23,127

Transportation and terminals revenue
 
291,064

 
137,953

 
44,146

 
(915
)
 
472,248

Product sales revenue
 
150,934

 
13,282

 
2,581

 
—

 
166,797

Affiliate management fee revenue
 
352

 
3,849

 
845

 
—

 
5,046

Total revenue
 
442,350

 
155,084

 
47,572

 
(915
)
 
644,091

Revenue not under the guidance of ASC 606, Revenue from Contracts with Customers:
 

 

 

 
 
 

Lease revenue(1)
 
(2,466
)
 
(16,463
)
 
(4,198
)
 
—

 
(23,127
)
Losses from futures contracts included in product sales revenue(2)
 
34,840

 
3,570

 
—

 
—

 
38,410

Affiliate management fee revenue
 
(352
)
 
(3,849
)
 
(845
)
 
—

 
(5,046
)
Total revenue from contracts with customers under ASC 606
 
$
474,372

 
$
138,342

 
$
42,529

 
$
(915
)
 
$
654,328


(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 June 30, 2019
 
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment Eliminations
 
Total
Transportation
 
$
201,173

 
$
91,534

 
$
—

 
$
—

 
$
292,707

Terminalling
 
48,554

 
4,723

 
690

 
—

 
53,967

Storage
 
25,471

 
34,972

 
34,485

 
(1,341
)
 
93,587

Ancillary services
 
28,128

 
6,611

 
6,581

 
—

 
41,320

Lease revenue
 
2,889

 
17,729

 
4,206

 
—

 
24,824

Transportation and terminals revenue
 
306,215

 
155,569

 
45,962

 
(1,341
)
 
506,405

Product sales revenue
 
183,211

 
5,295

 
1,483

 
—

 
189,989

Affiliate management fee revenue
 
470

 
3,646

 
1,189

 
—

 
5,305

Total revenue
 
489,896

 
164,510

 
48,634

 
(1,341
)
 
701,699

Revenue not under the guidance of ASC 606, Revenue from Contracts with Customers:
 
 
 
 
 
 
 
 
 
 
Lease revenue(1)
 
(2,889
)
 
(17,729
)
 
(4,206
)
 
—

 
(24,824
)
(Gains) losses from futures contracts included in product sales revenue(2)
 
4,713

 
(95
)
 
—

 
—

 
4,618

Affiliate management fee revenue
 
(470
)
 
(3,646
)
 
(1,189
)
 
—

 
(5,305
)
Total revenue from contracts with customers under ASC 606
 
$
491,250

 
$
143,040

 
$
43,239

 
$
(1,341
)
 
$
676,188


(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)



 
 
Six Months Ended June 30, 2018
 
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment Eliminations
 
Total
Transportation
 
$
351,498

 
$
163,878

 
$
—

 
$
—

 
$
515,376

Terminalling
 
89,922

 
—

 
1,304

 
—

 
91,226

Storage
 
50,216

 
58,526

 
67,530

 
(1,830
)
 
174,442

Ancillary services
 
54,247

 
13,234

 
13,071

 
—

 
80,552

Lease revenue
 
5,575

 
28,573

 
8,441

 
—

 
42,589

Transportation and terminals revenue
 
551,458

 
264,211

 
90,346

 
(1,830
)
 
904,185

Product sales revenue
 
383,708

 
19,721

 
4,960

 
—

 
408,389

Affiliate management fee revenue
 
649

 
7,865

 
1,782

 
—

 
10,296

Total revenue
 
935,815

 
291,797

 
97,088

 
(1,830
)
 
1,322,870

Revenue not under the guidance of ASC 606, Revenue from Contracts with Customers:
 
 
 
 
 
 
 
 
 
 
Lease revenue(1)
 
(5,575
)
 
(28,573
)
 
(8,441
)
 
—

 
(42,589
)
Losses from futures contracts included in product sales revenue(2)
 
40,305

 
5,480

 
—

 
—

 
45,785

Affiliate management fee revenue
 
(649
)
 
(7,865
)
 
(1,782
)
 
—

 
(10,296
)
Total revenue from contracts with customers under ASC 606
 
$
969,896

 
$
260,839

 
$
86,865

 
$
(1,830
)
 
$
1,315,770


(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)



 
 
Six Months Ended June 30, 2019
 
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment Eliminations
 
Total
Transportation
 
$
372,200

 
$
176,692

 
$
—

 
$
—

 
$
548,892

Terminalling
 
88,952

 
9,969

 
1,589

 
—

 
100,510

Storage
 
51,910

 
69,290

 
69,703

 
(2,279
)
 
188,624

Ancillary services
 
54,024

 
12,632

 
13,466

 
—

 
80,122

Lease revenue
 
6,134

 
34,594

 
8,321

 
—

 
49,049

Transportation and terminals revenue
 
573,220

 
303,177

 
93,079

 
(2,279
)
 
967,197

Product sales revenue
 
338,367

 
11,008

 
3,609

 
—

 
352,984

Affiliate management fee revenue
 
882

 
7,132

 
2,439

 
—

 
10,453

Total revenue
 
912,469

 
321,317

 
99,127

 
(2,279
)
 
1,330,634

Revenue not under the guidance of ASC 606, Revenue from Contracts with Customers:
 
 
 
 
 
 
 
 
 
 
Lease revenue(1)
 
(6,134
)
 
(34,594
)
 
(8,321
)
 
—

 
(49,049
)
Losses from futures contracts included in product sales revenue(2)
 
56,822

 
2,307

 
—

 
—

 
59,129

Affiliate management fee revenue
 
(882
)
 
(7,132
)
 
(2,439
)
 
—

 
(10,453
)
Total revenue from contracts with customers under ASC 606
 
$
962,275

 
$
281,898

 
$
88,367

 
$
(2,279
)
 
$
1,330,261


(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
 
June 30, 2019
Accounts receivable from contracts with customers
 
$
102,684

 
$
134,506

Contract assets
 
$
8,487

 
$
8,226

Contract liabilities
 
$
122,129

 
$
115,692



For the three and six months ended June 30, 2019, we recognized $13.8 million and $84.0 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 June 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 June 30, 2019
 
$
2,052,375

 
$
1,244,128

 
$
221,848

 
$
3,518,351

Remaining terms
 
1 - 19 years

 
1 - 10 years

 
1 - 5 years

 
 
Estimated revenues from UPOs to be recognized in the next 12 months
 
$
273,714

 
$
330,830

 
$
114,166

 
$
718,710




3.
Segment Disclosures

Our reportable segments are strategic business units that offer different products and services. Our segments are managed separately as each segment requires different marketing strategies and business knowledge. Management evaluates performance based on segment operating margin, which is calculated in the tables below.
We believe that investors benefit from having access to the same financial measures used by management. Operating margin, which is presented in the following tables, is an important measure used by management to evaluate the economic performance of our core operations. Operating margin is not a GAAP measure, but the components of operating margin are computed using amounts that are determined in accordance with GAAP. A reconciliation of operating margin to operating profit, which is its nearest comparable GAAP financial measure, is included in the tables below (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 June 30, 2018
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenue
$
291,064

 
$
137,953

 
$
44,146

 
$
(915
)
 
$
472,248

Product sales revenue
150,934

 
13,282

 
2,581

 
—

 
166,797

Affiliate management fee revenue
352

 
3,849

 
845

 
—

 
5,046

Total revenue
442,350

 
155,084

 
47,572

 
(915
)
 
644,091

Operating expenses
113,342

 
31,177

 
17,693

 
(2,367
)
 
159,845

Cost of product sales
137,543

 
13,761

 
2,375

 
—

 
153,679

(Earnings) losses of non-controlled entities
97

 
(41,851
)
 
(756
)
 
—

 
(42,510
)
Operating margin
191,368

 
151,997

 
28,260

 
1,452

 
373,077

Depreciation, amortization and impairment expense
30,508

 
12,741

 
8,918

 
1,452

 
53,619

G&A expense
33,187

 
13,455

 
6,648

 
—

 
53,290

Operating profit
$
127,673

 
$
125,801

 
$
12,694

 
$
—

 
$
266,168

 

14





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



 
Three Months Ended June 30, 2019
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenue
$
306,215

 
$
155,569

 
$
45,962

 
$
(1,341
)
 
$
506,405

Product sales revenue
183,211

 
5,295

 
1,483

 
—

 
189,989

Affiliate management fee revenue
470

 
3,646

 
1,189

 
—

 
5,305

Total revenue
489,896

 
164,510

 
48,634

 
(1,341
)
 
701,699

Operating expenses
115,811

 
37,217

 
18,586

 
(2,685
)
 
168,929

Cost of product sales
146,516

 
4,710

 
1,650

 
—

 
152,876

Other operating (income) expense
(738
)
 
6,056

 
(294
)
 
—

 
5,024

(Earnings) losses of non-controlled entities
4,218

 
(43,735
)
 
(1,268
)
 
—

 
(40,785
)
Operating margin
224,089

 
160,262

 
29,960

 
1,344

 
415,655

Depreciation, amortization and impairment expense
34,738

 
15,743

 
10,705

 
1,344

 
62,530

G&A expense
31,020

 
14,097

 
7,266

 
—

 
52,383

Operating profit
$
158,331

 
$
130,422

 
$
11,989

 
$
—

 
$
300,742



 
Six Months Ended June 30, 2018
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenue
$
551,458

 
$
264,211

 
$
90,346

 
$
(1,830
)
 
$
904,185

Product sales revenue
383,708

 
19,721

 
4,960

 
—

 
408,389

Affiliate management fee revenue
649

 
7,865

 
1,782

 
—

 
10,296

Total revenue
935,815

 
291,797

 
97,088

 
(1,830
)
 
1,322,870

Operating expenses
207,391

 
64,768

 
35,657

 
(4,675
)
 
303,141

Cost of product sales
327,876

 
20,811

 
4,584

 
—

 
353,271

Earnings of non-controlled entities
(2,221
)
 
(73,459
)
 
(1,368
)
 
—

 
(77,048
)
Operating margin
402,769

 
279,677

 
58,215

 
2,845

 
743,506

Depreciation, amortization and impairment expense
59,415

 
25,503

 
17,735

 
2,845

 
105,498

G&A expense
62,074

 
25,361

 
12,411

 
—

 
99,846

Operating profit
$
281,280

 
$
228,813

 
$
28,069

 
$
—

 
$
538,162

 
 
 
 
 
 
 
 
 
 

15





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



 
 
Six Months Ended June 30, 2019
 
Refined Products
 
Crude Oil
 
Marine Storage
 
Intersegment
Eliminations
 
Total
Transportation and terminals revenue
$
573,220

 
$
303,177

 
$
93,079

 
$
(2,279
)
 
$
967,197

Product sales revenue
338,367

 
11,008

 
3,609

 
—

 
352,984

Affiliate management fee revenue
882

 
7,132

 
2,439

 
—

 
10,453

Total revenue
912,469

 
321,317

 
99,127

 
(2,279
)
 
1,330,634

Operating expenses
205,489

 
81,040

 
33,483

 
(5,058
)
 
314,954

Cost of product sales
306,670

 
11,374

 
3,926

 
—

 
321,970

Other operating (income) expense
(1,352
)
 
4,483

 
(5,048
)
 
—

 
(1,917
)
(Earnings) losses of non-controlled entities
5,648

 
(76,037
)
 
(1,651
)
 
—

 
(72,040
)
Operating margin
396,014

 
300,457

 
68,417

 
2,779

 
767,667

Depreciation, amortization and impairment expense
70,272

 
31,002

 
20,348

 
2,779

 
124,401

G&A expense
58,735

 
26,712

 
12,931

 
—

 
98,378

Operating profit
$
267,007

 
$
242,743

 
$
35,138

 
$
—

 
$
544,888

 
 
 
 
 
 
 
 
 
 



4.
Investments in Non-Controlled Entities

Our investments in non-controlled entities at June 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 $1.2 million and $1.1 million during the three months ended June 30, 2018 and 2019, respectively, and $1.7 million and $2.6 million during the six months ended June 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 June 30,
 
Six Months Ended June 30,
 
 
2018
 
2019
 
2018
 
2019
Transportation and terminals revenue:
 
 
 
 
 
 
 
 
BridgeTex, pipeline capacity and storage
 
$
9,697

 
$
10,181

 
$
19,561

 
$
20,326

Double Eagle, throughput revenue
 
$
1,343

 
$
1,572

 
$
2,887

 
$
3,231

Saddlehorn, storage revenue
 
$
538

 
$
551

 
$
1,076

 
$
1,103

Operating costs:
 
 
 
 
 
 
 
 
Seabrook, storage lease and ancillary services
 
$
—

 
$
6,241

 
$
—

 
$
13,150

Product sales revenue:
 
 
 
 
 
 
 
 
Powder Springs, butane sales
 
$
2,180

 
$
—

 
$
4,899

 
$
—

Cost of product sales:
 
 
 
 
 
 
 
 
Powder Springs, butane purchases
 
$
410

 
$
—

 
$
410

 
$
—


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

 
$
—


 
 
June 30, 2019
 
 
Trade Accounts Receivable
 
Other Accounts Receivable
 
Other Accounts Payable
 
Long-Term Receivables
BridgeTex
 
$
—

 
$
31

 
$
530

 
$
—

Double Eagle
 
$
569

 
$
—

 
$
—

 
$
—

MVP
 
$
—

 
$
387

 
$
—

 
$
—

Powder Springs
 
$
144

 
$
5

 
$
—

 
$
3,824

Saddlehorn
 
$
184

 
$
123

 
$
—

 
$
—

Seabrook
 
$
—

 
$
252

 
$
1,195

 
$
—


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.

17





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




A summary of our investments in non-controlled entities follows (in thousands):
 
 
 
Investments at 12/31/2018
 
$
1,076,306

Additional investment
 
112,251

Indemnification settlement
 
(5,000
)
Earnings of non-controlled entities:
 
 
Proportionate share of earnings
 
72,968

Amortization of excess investment and capitalized interest
 
(928
)
Earnings of non-controlled entities
 
72,040

Less:
 
 
Distributions from operations of non-controlled entities
 
83,069

Distributions from returns of investments in non-controlled entities
 
7,500

Investments at 6/30/2019
 
$
1,165,028

 
 
 


5.
Inventory

Inventory at December 31, 2018 and June 30, 2019 was as follows (in thousands): 
 
December 31, 2018
 
June 30,
2019
Refined products
$
92,751

 
$
72,219

Liquefied petroleum gases
46,612

 
46,294

Transmix
28,497

 
32,891

Crude oil
11,220

 
15,051

Additives
6,655

 
6,452

Total inventory
$
185,735

 
$
172,907




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 $2.3 million and $2.4 million for the three months ended June 30, 2018 and 2019, respectively, and $6.1 million and $6.5 million for the six months ended June 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 six months ended June 30, 2018 and 2019 was as follows (in thousands):
 
 
Three Months Ended
 
Three Months Ended
 
June 30, 2018
 
June 30, 2019
 
Pension
Benefits
 
Other  Postretirement
Benefits
 
Pension
Benefits
 
Other  Postretirement
Benefits
Components of net periodic benefit costs:
 
 
 
 
 
 
 
Service cost
$
6,269

 
$
51

 
$
6,358

 
$
43

Interest cost
2,795

 
102

 
3,110

 
135

Expected return on plan assets
(3,024
)
 
—

 
(2,317
)
 
—

Amortization of prior service credit
(46
)
 
—

 
(45
)
 
—

Amortization of actuarial loss
1,569

 
134

 
1,508

 
117

Settlement cost
—

 
—

 
2,060

 
—

Net periodic benefit cost
$
7,563

 
$
287

 
$
10,674

 
$
295

 
 
Six Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2019
 
Pension
Benefits
 
Other  Postretirement
Benefits
 
Pension
Benefits
 
Other  Postretirement
Benefits
Components of net periodic benefit costs:
 
 
 
 
 
 
 
Service cost
$
21,969

 
$
116

 
$
12,885

 
$
97

Interest cost
9,238

 
208

 
6,110

 
254

Expected return on plan assets
(6,002
)
 
—

 
(4,691
)
 
—

Amortization of prior service credit
(91
)
 
—

 
(90
)
 
—

Amortization of actuarial loss
6,523

 
294

 
2,785

 
188

Settlement cost
—

 
—

 
2,060

 
—

Net periodic benefit cost
$
31,637

 
$
618

 
$
19,059

 
$
539

 
 
 
 
 
 
 
 
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 six months ended June 30, 2018 and 2019 were as follows (in thousands):
 
 
Three Months Ended
 
Three Months Ended
 
 
June 30, 2018
 
June 30, 2019
Gains (Losses) Included in AOCL
 
Pension Benefits
 
Other Postretirement Benefits
 
Pension Benefits
 
Other Postretirement Benefits
Beginning balance
 
$
(98,261
)
 
$
(6,437
)
 
$
(87,370
)
 
$
(5,338
)
Net actuarial gain (loss)
 
386

 
267

 
(10,029
)
 
(884
)
Amortization of prior service credit
 
(46
)
 
—

 
(45
)
 
—

Amortization of actuarial loss
 
1,569

 
134

 
1,508

 
117

Settlement cost
 
—

 
—

 
2,060

 
—

Ending balance
 
$
(96,352
)
 
$
(6,036
)
 
$
(93,876
)
 
$
(6,105
)
 
 
Six Months Ended
 
Six Months Ended
 
 
June 30, 2018
 
June 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
 
(91
)
 
—

 
(90
)
 
—

Amortization of actuarial loss
 
6,523

 
294

 
2,785

 
188

Settlement cost
 
—

 
—

 
2,060

 
—

Ending balance
 
$
(96,352
)
 
$
(6,036
)
 
$
(93,876
)
 
$
(6,105
)
 
 
 
 
 
 
 
 
 

Contributions estimated to be paid into the plans in 2019 are $31.6 million and $0.6 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.

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,

20





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



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 our equity investee, 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. This arrangement meets the definition of an operating lease, and our lease liability includes renewal options necessary to maintain control of the assets for a time period sufficient to meet our performance obligations to our third party customers.

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 June 30, 2019 are as follows (in thousands):

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



 
Third Party Leases
 
Seabrook Lease
 
All Leases
2019
$
12,961

 
$
5,214

 
$
18,175

2020
18,510

 
10,429

 
28,939

2021
18,875

 
8,973

 
27,848

2022
18,748

 
6,612

 
25,360

2023
18,225

 
6,612

 
24,837

Thereafter
33,676

 
37,473

 
71,149

Total future minimum rental payments
120,995

 
75,313

 
196,308

Present value discount
14,105

 
13,000

 
27,105

Total operating lease liability
$
106,890

 
$
62,313

 
$
169,203



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

 
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
 
 
Third Party Leases
 
Seabrook Lease
 
All Leases
 
Third Party Leases
 
Seabrook Lease
 
All Leases
Fixed lease cost
 
$
4,762

 
$
2,588

 
$
7,350

 
$
9,583

 
$
5,343

 
$
14,926

Short-term lease cost
 
353

 
—

 
353

 
810

 
—

 
810

Variable lease cost
 
661

 
—

 
661

 
1,032

 
—

 
1,032

Total lease cost
 
$
5,776

 
$
2,588

 
$
8,364

 
$
11,425

 
$
5,343

 
$
16,768

 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
As of and for the Six Months Ended June 30, 2019
 
 
Third Party Leases
 
Seabrook Lease
 
All Leases
Current lease liability
 
$
14,480

 
$
7,997

 
$
22,477

Long-term lease liability
 
$
92,411

 
$
54,315

 
$
146,726

Right-of-use asset
 
$
105,143

 
$
62,313

 
$
167,456

 
 
 
 
 
 
 
Operating cash flows from operating leases
 
$
6,663

 
5,363

 
$
12,026

Weighted average remaining lease term (years)
 
7

 
9

 
8

Weighted-average discount rate
 
4.0%
 
4.2%
 
4.1%
 
 
 
 
 
 
 


Rent expense was $9.5 million and $18.5 million, respectively, for three and six months ended June 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.


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



Future minimum payments receivable under operating leases with terms greater than one year as of June 30, 2019 are estimated as follows (in thousands):
2019
$
19,744

2020
33,584

2021
33,253

2022
23,544

2023
7,652

Thereafter
15,740

Total
$
133,517


 
We recognized variable lease revenue of $14.2 million and $27.9 million, respectively, for the three and six months ended June 30, 2019, primarily related to our condensate splitter in Corpus Christi, Texas.

At June 30, 2019, property, plant and equipment utilized by our customers in operating lease arrangements consisted of: $226.5 million of processing equipment; $73.6 million of storage tanks; $53.5 million of pipeline and station equipment; and $26.7 million of other assets. The processing equipment primarily relates to our condensate splitter.

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 June 30, 2019 was as follows (in thousands):
 
 
December 31, 2018
 
June 30,
2019
Total minimum lease payments receivable
 
$
17,468

 
$
16,594

Less: Unearned income
 
3,422

 
3,112

Recorded net investment in sales-type lease
 
$
14,046

 
$
13,482


The net investment in sales-type leases was classified in the consolidated balance sheets as follows (in thousands):
 
 
December 31, 2018
 
June 30,
2019
Other accounts receivable
 
$
1,138

 
$
1,164

Long-term receivables
 
12,908

 
12,318

Total
 
$
14,046

 
$
13,482


Future minimum payments receivable under this lease are $0.9 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 June 30, 2019 was as follows (in thousands):
 
 
December 31,
2018
 
June 30,
2019
Commercial paper
 
$
—

 
$
197,000

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

Face value of long-term debt
 
4,300,000

 
4,447,000

Unamortized debt issuance costs(1)
 
(27,070
)
 
(31,195
)
Net unamortized debt discount(1)
 
(2,927
)
 
(8,012
)
Net unamortized amount of gains from historical fair value hedges(1)
 
866

 
—

Long-term debt, net, including current portion
 
4,270,869

 
4,407,793

Less: Current portion of long-term debt, net
 
59,489

 
—

Long-term debt, net
 
$
4,211,380

 
$
4,407,793

 
 
 
 
 

(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 Issuance

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 June 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 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 June 30, 2019. Borrowings under this facility may be used for general partnership purposes, including capital expenditures. As of December 31, 2018 and June 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

24





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



of credit are not reflected as debt on our consolidated balance sheets, but decrease our borrowing capacity under this facility.

In second quarter 2019, 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 June 30, 2019. Borrowings under this facility may be used for general purposes, including capital expenditures. As of June 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 six months ended June 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 expenses 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.

At June 30, 2019, we had $100.0 million of treasury lock agreements outstanding to protect against the risk of variability of a portion of debt issuances we anticipate to occur in 2019. The fair value of these interest rate derivative agreements at June 30, 2019 was recorded as a current liability of $11.1 million, with the offset recorded to other comprehensive income. We account for these agreements as cash flow hedges.

In first quarter 2019, upon issuance of $500.0 million of 4.85% notes due 2049, we terminated and settled $150.0 million of 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 recorded to other comprehensive income and will be recognized into earnings as an adjustment to our periodic interest expense over the life of the debt issuance.


25





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



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 June 30, 2019 were as follows:
Type of Contract/Accounting Methodology
 
Product Represented by the Contract and Associated Barrels
 
Maturity Dates
Futures - Economic Hedges
 
4.3 million barrels of refined products and crude oil
 
Between July 2019 and April 2020
Futures - Economic Hedges
 
1.3 million barrels of butane and natural gasoline
 
Between July 2019 and April 2020


Energy Commodity Derivatives Contracts and Deposits Offsets

At June 30, 2019, we had made margin deposits of $27.5 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 June 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 6/30/2019
 
$
(11,655
)
 
$
2,558

 
$
(9,097
)
 
$
27,533

 
$
18,436

 
 
 
 
 
 
 
 
 
 
 

(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 currently in other operating income (expense) in our consolidated statements of income. The liability for this agreement at June 30, 2019 was $12.6 million.

Impact of Derivatives on Our Financial Statements

Comprehensive Income

The changes in derivative activity included in AOCL for the three and six months ended June 30, 2018 and 2019 were as follows (in thousands):
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
Derivative Losses Included in AOCL
2018
 
2019
 
2018
 
2019
Beginning balance
$
(27,601
)
 
$
(30,229
)
 
$
(33,755
)
 
$
(26,480
)
Net gain (loss) on cash flow hedges
1,697

 
(6,659
)
 
7,111

 
(11,035
)
Reclassification of net loss on cash flow hedges to income
739

 
601

 
1,479

 
1,228

Ending balance
$
(25,165
)
 
$
(36,287
)
 
$
(25,165
)
 
$
(36,287
)


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 six months ended June 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 June 30, 2018
 
$
1,697

 
Interest expense
 
$
(739
)
Three Months Ended June 30, 2019
 
$
(6,659
)
 
Interest expense
 
$
(601
)

Six Months Ended June 30, 2018
 
$
7,111

 
Interest expense
 
$
(1,479
)
Six Months Ended June 30, 2019
 
$
(11,035
)
 
Interest expense
 
$
(1,228
)


As of June 30, 2019, the net loss estimated to be classified to interest expense over the next twelve months from AOCL is approximately $2.4 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 six months ended June 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
 
Six Months Ended
 
 
Location of Gain (Loss)
Recognized on Derivatives
 
June 30,
 
June 30,
Derivative Instrument
 
 
2018
 
2019
 
2018
 
2019
Futures contracts
 
Product sales revenue
 
$
(38,411
)
 
$
(4,619
)
 
$
(45,786
)
 
$
(59,130
)
Futures contracts
 
Cost of product sales
 
8,337

 
(6,148
)
 
4,393

 
(3,875
)
Basis derivative agreement
 
Other operating income (expense)
 
—

 
(6,487
)
 
—

 
(4,959
)
 
 
Total
 
$
(30,074
)
 
$
(17,254
)
 
$
(41,393
)
 
$
(67,964
)

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 tables provide a summary of the fair value of derivatives, which are presented on a net basis in our consolidated balance sheets, that were designated as hedging instruments as of December 31, 2018 and June 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
 
$
462

 
Energy commodity derivatives contracts, net
 
$
—

Interest rate contracts
 
Other current assets
 
312

 
Other current liabilities
 
8,438

 
 
Total
 
$
774

 
Total
 
$
8,438

 
 
 
June 30, 2019
 
 
Asset Derivatives
 
Liability Derivatives
Derivative Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Interest rate contracts
 
Other current assets
 
$
—

 
Other current liabilities
 
$
11,133


 
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 June 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

 
 
 
 
 
 
 
 
 
 
 
June 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
 
$
2,558

 
Energy commodity derivatives contracts, net
 
$
11,655

Basis derivative agreement
 
Other current assets
 
—

 
Other current liabilities
 
4,979

Basis derivative agreement
 
Other noncurrent assets
 
—

 
Other noncurrent liabilities
 
7,620

 
 
Total