Magellan Midstream Partners, L.P. - Quarter Report: 2020 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, 2020
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 | 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 30, 2020, there were 225,056,287 common units outstanding.
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. | ||||
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
Forward-Looking Statements
Except for statements of historical fact, all statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements may be identified by words like “anticipates,” “believes,” “continue,” “could,” “estimates,” “expects,” “forecasts,” “goal,” “guidance,” “intends,” “may,” “might,” “plans,” “potential,” “projected,” “scheduled,” “should,” “will” and other similar expressions. The absence of such words or expressions does not necessarily mean the statements are not forward-looking. Although we believe our forward-looking statements are reasonable, statements made regarding future results are not guarantees of future performance and are subject to numerous assumptions, uncertainties and risks that are difficult to predict, including those described in Part II, Item 1A – Risk Factors of this Quarterly Report on Form 10-Q. Actual outcomes and results may be materially different from the results stated or implied in such forward-looking statements included in this report. You should not put any undue reliance on any forward-looking statement.
The following are among the important factors that could cause future results to differ materially from any expected, projected, forecasted, estimated or budgeted amounts, events or circumstances we have discussed in this report:
• | overall demand for refined products, crude oil and liquefied petroleum gases; |
• | price fluctuations for refined products, crude oil and liquefied petroleum gases and expectations about future prices for these products; |
• | changes in the production of crude oil in the basins served by our pipelines; |
• | changes in general economic conditions, interest rates and price levels; |
• | changes in the financial condition of our customers, vendors, derivatives counterparties, lenders or joint venture co-owners; |
• | our ability to secure financing in the credit and capital markets in amounts and on terms that will allow us to execute our business strategy, refinance our existing obligations when due and maintain adequate liquidity; |
• | development of alternative energy sources, including but not limited to natural gas, solar power, wind power, electric and battery-powered engines and geothermal energy, increased use of biofuels such as ethanol and biodiesel, increased conservation or fuel efficiency, increased use of electric vehicles, as well as regulatory developments or other trends that could affect demand for our services; |
• | changes in population in the markets served by our refined products pipeline system and changes in consumer preferences, driving patterns or rates of automobile ownership; |
• | changes in the product quality, throughput or interruption in service of refined products or crude oil pipelines owned and operated by third parties and connected to our assets; |
• | changes in demand for transportation or storage in our refined products or crude oil segments; |
• | changes in supply and demand patterns for our facilities due to geopolitical events, the activities of the Organization of the Petroleum Exporting Countries, changes in U.S. trade policies or in laws governing the importing and exporting of petroleum products, technological developments or other factors; |
• | our ability to manage interest rate and commodity price exposures; |
• | changes in our tariff rates or other terms of service implemented by the Federal Energy Regulatory Commission or state regulatory agencies; |
• | shut-downs or cutbacks at refineries, oil wells, petrochemical plants or other customers or businesses that use or supply our services; |
• | the effect of weather patterns and other natural phenomena, including climate change, on our operations and demand for our services; |
• | an increase in the competition our operations encounter, including the effects of capacity over-build in the areas where we operate; |
• | the occurrence of natural disasters, epidemics, terrorism, sabotage, protests or activism, operational hazards, equipment failures, system failures or unforeseen interruptions; |
• | changes in general economic conditions, including market and macro-economic disruptions resulting from the COVID-19 pandemic and related governmental responses; |
2
• | our ability to obtain adequate levels of insurance at a reasonable cost, and the potential for losses to exceed the insurance coverage we do obtain; |
• | the treatment of us as a corporation for federal or state income tax purposes or if we become subject to significant forms of other taxation or more aggressive enforcement or increased assessments under existing forms of taxation; |
• | our ability to identify expansion projects with acceptable expected returns or to complete identified expansion projects on time and at projected costs; |
• | our ability to make and integrate accretive acquisitions and joint ventures and successfully execute our business strategy; |
• | uncertainty of estimates, including accruals and costs of environmental remediation; |
• | our ability to cooperate with and rely on our joint venture co-owners; |
• | actions by rating agencies concerning our credit ratings; |
• | our ability to timely obtain and maintain all necessary approvals, consents and permits required to operate our existing assets and to construct, acquire and operate any new or modified assets; |
• | our ability to promptly obtain all necessary services, materials, labor, supplies and rights-of-way required for maintenance and operation of our current assets and construction of our growth projects, without significant delays, disputes or cost overruns; |
• | risks inherent in the use and security of information systems in our business and implementation of new software and hardware; |
• | changes in laws and regulations or the interpretations of such laws that govern our gas liquids blending activities, including the potential applicability of the Carmack Amendment, which broadly covers claims for damage or loss incurred to goods transported by a carrier in interstate commerce, to such activities, or changes regarding product quality specifications or renewable fuel obligations that impact our ability to produce gasoline volumes through our gas liquids blending activities or that require significant capital outlays for compliance; |
• | changes in laws and regulations to which we or our customers are or could become subject, including tax withholding requirements, safety, security, employment, hydraulic fracturing, derivatives transactions, trade and environmental laws and regulations, including laws and regulations designed to address climate change; |
• | the cost and effects of legal and administrative claims and proceedings against us, our subsidiaries or our joint ventures; |
• | the amount of our indebtedness, which could make us vulnerable to general adverse economic and industry conditions, limit our ability to borrow additional funds, place us at competitive disadvantages compared to our competitors that have less debt or have other adverse consequences; |
• | the effect of changes in accounting policies; |
• | the potential that our internal controls may not be adequate, weaknesses may be discovered or remediation of any identified weaknesses may not be successful; |
• | the ability and intent of our customers, vendors, lenders, joint venture co-owners or other third parties to perform on their contractual obligations to us; |
• | petroleum product supply disruptions; |
• | global and domestic repercussions from terrorist activities, including cyber attacks, and the government’s response thereto; and |
• | other factors and uncertainties inherent in the transportation, storage and distribution of petroleum products and the operation, acquisition and construction of assets related to such activities. |
This list of important factors is not exhaustive. The forward-looking statements in this Quarterly Report speak only as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changes in assumptions or otherwise, unless required by law.
3
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, | ||||||||||||||
2019 | 2020 | 2019 | 2020 | ||||||||||||
Transportation and terminals revenue | $ | 506,405 | $ | 411,815 | $ | 967,197 | $ | 870,210 | |||||||
Product sales revenue | 189,989 | 43,277 | 352,984 | 362,397 | |||||||||||
Affiliate management fee revenue | 5,305 | 5,316 | 10,453 | 10,607 | |||||||||||
Total revenue | 701,699 | 460,408 | 1,330,634 | 1,243,214 | |||||||||||
Costs and expenses: | |||||||||||||||
Operating | 168,929 | 146,107 | 314,954 | 295,615 | |||||||||||
Cost of product sales | 152,876 | 50,509 | 321,970 | 299,745 | |||||||||||
Depreciation, amortization and impairment | 62,530 | 58,540 | 124,401 | 122,074 | |||||||||||
General and administrative | 52,383 | 42,168 | 98,378 | 79,076 | |||||||||||
Total costs and expenses | 436,718 | 297,324 | 859,703 | 796,510 | |||||||||||
Other operating income (expense) | (5,024 | ) | 3,913 | 1,917 | 3,402 | ||||||||||
Earnings of non-controlled entities | 40,785 | 33,689 | 72,040 | 77,349 | |||||||||||
Operating profit | 300,742 | 200,686 | 544,888 | 527,455 | |||||||||||
Interest expense | 51,406 | 69,259 | 111,572 | 125,159 | |||||||||||
Interest capitalized | (5,134 | ) | (4,228 | ) | (8,588 | ) | (9,179 | ) | |||||||
Interest income | (338 | ) | (223 | ) | (1,998 | ) | (643 | ) | |||||||
Gain on disposition of assets | (4,646 | ) | — | (26,434 | ) | (12,887 | ) | ||||||||
Other (income) expense | 4,570 | 1,446 | 6,620 | 2,253 | |||||||||||
Income before provision for income taxes | 254,884 | 134,432 | 463,716 | 422,752 | |||||||||||
Provision for income taxes | 1,181 | 589 | 2,350 | 1,345 | |||||||||||
Net income | $ | 253,703 | $ | 133,843 | $ | 461,366 | $ | 421,407 | |||||||
Basic net income per common unit | $ | 1.11 | $ | 0.59 | $ | 2.02 | $ | 1.86 | |||||||
Diluted net income per common unit | $ | 1.11 | $ | 0.59 | $ | 2.02 | $ | 1.86 | |||||||
Weighted average number of common units outstanding used for basic net income per unit calculation | 228,647 | 225,351 | 228,603 | 226,461 | |||||||||||
Weighted average number of common units outstanding used for diluted net income per unit calculation | 228,688 | 225,351 | 228,623 | 226,461 |
See notes to consolidated financial statements.
4
MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited, in thousands)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2019 | 2020 | 2019 | 2020 | ||||||||||||
Net income | $ | 253,703 | $ | 133,843 | $ | 461,366 | $ | 421,407 | |||||||
Other comprehensive income (loss): | |||||||||||||||
Derivative activity: | |||||||||||||||
Net gain (loss) on cash flow hedges | (6,659 | ) | 1,470 | (11,035 | ) | (10,444 | ) | ||||||||
Reclassification of net loss on cash flow hedges to income | 601 | 847 | 1,228 | 1,656 | |||||||||||
Changes in employee benefit plan assets and benefit obligations recognized in other comprehensive income: | |||||||||||||||
Net actuarial gain (loss) | (10,913 | ) | 414 | (10,913 | ) | (333 | ) | ||||||||
Curtailment gain | — | — | — | 1,703 | |||||||||||
Recognition of prior service credit amortization in income | (45 | ) | (45 | ) | (90 | ) | (90 | ) | |||||||
Recognition of actuarial loss amortization in income | 1,625 | 1,458 | 2,973 | 2,989 | |||||||||||
Recognition of settlement cost in income | 2,060 | — | 2,060 | 969 | |||||||||||
Total other comprehensive income (loss) | (13,331 | ) | 4,144 | (15,777 | ) | (3,550 | ) | ||||||||
Comprehensive income | $ | 240,372 | $ | 137,987 | $ | 445,589 | $ | 417,857 |
See notes to consolidated financial statements.
5
MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, 2019 | June 30, 2020 | ||||||
ASSETS | (Unaudited) | ||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 58,030 | $ | 2,863 | |||
Trade accounts receivable | 125,440 | 92,884 | |||||
Other accounts receivable | 23,887 | 18,761 | |||||
Inventory | 184,399 | 116,384 | |||||
Commodity derivatives deposits | 27,415 | 25,456 | |||||
Reimbursable costs | 7,878 | 28,958 | |||||
Other current assets | 32,359 | 31,938 | |||||
Total current assets | 459,408 | 317,244 | |||||
Property, plant and equipment | 8,431,227 | 8,243,106 | |||||
Less: accumulated depreciation | 2,027,193 | 1,971,268 | |||||
Net property, plant and equipment | 6,404,034 | 6,271,838 | |||||
Investments in non-controlled entities | 1,240,551 | 1,207,670 | |||||
Right-of-use asset, operating leases | 171,868 | 158,855 | |||||
Long-term receivables | 20,782 | 21,517 | |||||
Goodwill | 53,260 | 52,830 | |||||
Other intangibles (less accumulated amortization of $6,255 and $7,590 at December 31, 2019 and June 30, 2020, respectively) | 47,898 | 46,563 | |||||
Restricted cash | 26,569 | 6,293 | |||||
Other noncurrent assets | 13,359 | 22,180 | |||||
Total assets | $ | 8,437,729 | $ | 8,104,990 | |||
LIABILITIES AND PARTNERS’ CAPITAL | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 150,992 | $ | 119,678 | |||
Accrued payroll and benefits | 75,511 | 40,574 | |||||
Accrued interest payable | 64,276 | 55,545 | |||||
Accrued taxes other than income | 66,007 | 51,660 | |||||
Deferred revenue | 109,654 | 105,670 | |||||
Accrued product liabilities | 90,788 | 52,890 | |||||
Commodity derivatives contracts, net | 10,222 | 13,531 | |||||
Current portion of operating lease liability | 26,221 | 27,251 | |||||
Other current liabilities | 73,205 | 54,351 | |||||
Total current liabilities | 666,876 | 521,150 | |||||
Long-term operating lease liability | 144,023 | 134,274 | |||||
Long-term debt, net | 4,706,075 | 4,792,649 | |||||
Long-term pension and benefits | 145,992 | 143,459 | |||||
Other noncurrent liabilities | 59,735 | 58,720 | |||||
Commitments and contingencies | |||||||
Partners’ capital: | |||||||
Common unitholders (228,403 units and 225,056 units outstanding at December 31, 2019 and June 30, 2020, respectively) | 2,877,105 | 2,620,365 | |||||
Accumulated other comprehensive loss | (162,077 | ) | (165,627 | ) | |||
Total partners’ capital | 2,715,028 | 2,454,738 | |||||
Total liabilities and partners’ capital | $ | 8,437,729 | $ | 8,104,990 | |||
See notes to consolidated financial statements.
6
MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Six Months Ended | |||||||
June 30, | |||||||
2019 | 2020 | ||||||
Operating Activities: | |||||||
Net income | $ | 461,366 | $ | 421,407 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation, amortization and impairment expense | 124,401 | 122,074 | |||||
Gain on sale and retirement of assets | (26,437 | ) | (13,187 | ) | |||
Earnings of non-controlled entities | (72,040 | ) | (77,349 | ) | |||
Distributions from operations of non-controlled entities | 83,069 | 102,699 | |||||
Equity-based incentive compensation expense | 15,804 | 4,411 | |||||
Settlement gain, amortization of prior service credit and actuarial loss | 4,943 | 2,526 | |||||
Debt prepayment costs | 8,270 | 12,893 | |||||
Changes in operating assets and liabilities: | |||||||
Trade accounts receivable and other accounts receivable | (35,757 | ) | 33,394 | ||||
Inventory | 12,828 | 66,776 | |||||
Accounts payable | 22,110 | 12,312 | |||||
Accrued payroll and benefits | (22,880 | ) | (34,937 | ) | |||
Accrued interest payable | (5,453 | ) | (8,731 | ) | |||
Accrued taxes other than income | (4,945 | ) | (12,522 | ) | |||
Accrued product liabilities | 977 | (37,898 | ) | ||||
Deferred revenue | (9,189 | ) | (3,984 | ) | |||
Other current and noncurrent assets and liabilities | 13,493 | (26,631 | ) | ||||
Net cash provided by operating activities | 570,560 | 563,253 | |||||
Investing Activities: | |||||||
Additions to property, plant and equipment, net(1) | (487,662 | ) | (292,217 | ) | |||
Proceeds from sale and disposition of assets | 63,887 | 332,872 | |||||
Investments in non-controlled entities | (112,251 | ) | (59,458 | ) | |||
Distributions from returns of investments in non-controlled entities | 7,500 | — | |||||
Deposits received from undivided joint interest third party | 26,352 | — | |||||
Net cash used by investing activities | (502,174 | ) | (18,803 | ) | |||
Financing Activities: | |||||||
Distributions paid | (457,377 | ) | (466,019 | ) | |||
Net commercial paper borrowings | 197,000 | 141,000 | |||||
Borrowings under long-term notes | 496,855 | 499,400 | |||||
Payments on notes | (550,000 | ) | (550,000 | ) | |||
Debt placement costs | (6,817 | ) | (4,255 | ) | |||
Net payment on financial derivatives | (8,028 | ) | (10,444 | ) | |||
Payments associated with settlement of equity-based incentive compensation | (9,764 | ) | (14,700 | ) | |||
Debt prepayment costs | (8,270 | ) | (12,893 | ) | |||
Repurchases of common units | — | (201,982 | ) | ||||
Net cash used by financing activities | (346,401 | ) | (619,893 | ) | |||
Change in cash, cash equivalents and restricted cash | (278,015 | ) | (75,443 | ) | |||
Cash, cash equivalents and restricted cash at beginning of period | 309,261 | 84,599 | |||||
Cash, cash equivalents and restricted cash at end of period | $ | 31,246 | $ | 9,156 | |||
Supplemental non-cash investing activities: | |||||||
(1) Additions to property, plant and equipment | $ | (514,812 | ) | $ | (235,587 | ) | |
Changes in accounts payable and other current liabilities related to capital expenditures | 27,150 | (56,630 | ) | ||||
Additions to property, plant and equipment, net | $ | (487,662 | ) | $ | (292,217 | ) |
See notes to consolidated financial statements.
7
MAGELLAN MIDSTREAM PARTNERS, L.P.
CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL
(Unaudited, in thousands)
Common Unitholders | Accumulated Other Comprehensive Loss | Total Partners’ Capital | ||||||||||||
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 (loss) | 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 | |||||||
Balance, April 1, 2020 | $ | 2,713,748 | $ | (169,771 | ) | $ | 2,543,977 | |||||||
Comprehensive income: | ||||||||||||||
Net income | 133,843 | — | 133,843 | |||||||||||
Total other comprehensive income | — | 4,144 | 4,144 | |||||||||||
Total comprehensive income | 133,843 | 4,144 | 137,987 | |||||||||||
Distributions | (231,245 | ) | — | (231,245 | ) | |||||||||
Equity-based incentive compensation expense | 4,256 | — | 4,256 | |||||||||||
Other | (237 | ) | — | (237 | ) | |||||||||
Three Months Ended June 30, 2020 | $ | 2,620,365 | $ | (165,627 | ) | $ | 2,454,738 | |||||||
8
MAGELLAN MIDSTREAM PARTNERS, L.P. CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL (Continued) (Unaudited, in thousands) | ||||||||||||||
Common Unitholders | Accumulated Other Comprehensive Loss | Total Partners’ Capital | ||||||||||||
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 (loss) | 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 | |||||||
Balance, January 1, 2020 | $ | 2,877,105 | $ | (162,077 | ) | $ | 2,715,028 | |||||||
Comprehensive income: | ||||||||||||||
Net income | 421,407 | — | 421,407 | |||||||||||
Total other comprehensive loss | — | (3,550 | ) | (3,550 | ) | |||||||||
Total comprehensive income (loss) | 421,407 | (3,550 | ) | 417,857 | ||||||||||
Distributions | (466,019 | ) | — | (466,019 | ) | |||||||||
Equity-based incentive compensation expense | 4,411 | — | 4,411 | |||||||||||
Repurchases of common units | (201,982 | ) | — | (201,982 | ) | |||||||||
Issuance of limited partner units in settlement of equity-based incentive plan awards | 600 | — | 600 | |||||||||||
Payments associated with settlement of equity-based incentive compensation | (14,700 | ) | — | (14,700 | ) | |||||||||
Other | (457 | ) | — | (457 | ) | |||||||||
Six Months Ended June 30, 2020 | $ | 2,620,365 | $ | (165,627 | ) | $ | 2,454,738 | |||||||
See notes to consolidated financial statements.
9
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 common 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.
During first quarter 2020, we completed a reorganization of our reportable segments. This reorganization was effected to reflect changes in the management of our business in conjunction with the sale of three of our marine terminals. Following this sale, two of our remaining marine terminals were combined with our refined products segment and one terminal was combined with our crude oil segment based on the predominant types of product stored at the facilities. Accordingly, we have restated our segment disclosures for all previous periods included in this report.
Description of Business
On March 20, 2020, we sold three marine terminals to a subsidiary of Buckeye Partners, L.P. (“Buckeye”) for $251.8 million, net of working capital adjustments. These terminals are located in New Haven, Connecticut, Wilmington, Delaware and Marrero, Louisiana. We recognized a $6.2 million impairment loss related to the sale on our consolidated statements of income.
We are principally engaged in the transportation, storage and distribution of refined petroleum products and crude oil. As of June 30, 2020, our asset portfolio consisted of:
• | our refined products segment, comprised of our approximately 9,800-mile refined products pipeline system with 53 connected terminals, as well as 25 independent terminals not connected to our pipeline system and two marine storage terminals (one of which is owned through a joint venture); and |
• | our crude oil segment, comprised of approximately 2,200 miles of crude oil pipelines, a condensate splitter and 37 million barrels of aggregate storage capacity, of which approximately 25 million barrels are used for contract storage. Approximately 1,000 miles of these pipelines, the condensate splitter and 30 million barrels of this storage capacity (including 22 million barrels used for contract storage) 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 crude oil refineries that are primarily used as fuels by consumers. Refined products include gasoline, diesel fuel, aviation fuel, kerosene and heating oil. Diesel fuel, kerosene and heating oil are referred to as distillates; |
• | transmix is a mixture of refined products that forms when transported in pipelines. Transmix is fractionated and blended into usable refined products; |
• | liquefied petroleum gases, or LPGs, are liquids produced as by-products of the crude oil refining process and in connection with natural gas production. LPGs include butane and propane; |
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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
• | blendstocks are products 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 products 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 a naturally occurring unrefined petroleum product recovered from underground that is used as feedstock by refineries, splitters and petrochemical facilities; and |
• | biofuels, such as ethanol and biodiesel, are fuels derived from living materials and 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, 2019, 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, 2020, the results of operations for the three and six months ended June 30, 2019 and 2020 and cash flows for the six months ended June 30, 2019 and 2020. The results of operations for the six months ended June 30, 2020 are not necessarily indicative of the results to be expected for the full year ending December 31, 2020 for several reasons. Profits from our gas liquids 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. Finally, we expect the impact of COVID-19 on demand for petroleum products and the decline in commodity prices to continue to affect our results of operations in the remaining two quarters of 2020, resulting in decreased transportation and terminalling revenues and reduced profits from our gas liquids blending activities.
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 Form 8-K filed with the Securities and Exchange Commission on May 4, 2020, which reflects changes in our reporting segments since the filing of our Annual Report on Form 10-K for the year ended December 31, 2019.
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.
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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
New Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326). The new guidance is effective for reporting periods beginning after December 15, 2019. The standard replaces the incurred loss impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires the use of a forward-looking expected credit loss model for accounts receivables, loans and other financial instruments. The standard requires a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We adopted the new guidance as of January 1, 2020 using the modified retrospective approach related to our accounts receivables and contract assets, resulting in no cumulative adjustment to retained earnings. The adoption of this guidance did not have a material impact on our consolidated statements of income for the three and six month periods ended June 30, 2020.
2. | Segment Disclosures |
Our reportable segments are strategic business units that offer different products and services. Our segments are managed separately as each segment requires different marketing strategies and business knowledge. Management evaluates performance based on segment operating margin, which includes revenue from affiliates and third-party customers, operating expenses, cost of product sales, other operating (income) expense and earnings of non-controlled entities.
We believe that investors benefit from having access to the same financial measures used by management. Operating margin, which is presented in the following tables, is an important measure used by management to 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, 2019 | |||||||||||||||
Refined Products | Crude Oil | Intersegment Eliminations | Total | ||||||||||||
Transportation and terminals revenue | $ | 347,630 | $ | 160,116 | $ | (1,341 | ) | $ | 506,405 | ||||||
Product sales revenue | 184,695 | 5,294 | — | 189,989 | |||||||||||
Affiliate management fee revenue | 1,659 | 3,646 | — | 5,305 | |||||||||||
Total revenue | 533,984 | 169,056 | (1,341 | ) | 701,699 | ||||||||||
Operating expenses | 132,850 | 38,764 | (2,685 | ) | 168,929 | ||||||||||
Cost of product sales | 148,166 | 4,710 | — | 152,876 | |||||||||||
Other operating (income) expense | (1,031 | ) | 6,055 | — | 5,024 | ||||||||||
(Earnings) loss of non-controlled entities | 2,950 | (43,735 | ) | — | (40,785 | ) | |||||||||
Operating margin | 251,049 | 163,262 | 1,344 | 415,655 | |||||||||||
Depreciation, amortization and impairment expense | 44,637 | 16,549 | 1,344 | 62,530 | |||||||||||
G&A expense | 37,560 | 14,823 | — | 52,383 | |||||||||||
Operating profit | $ | 168,852 | $ | 131,890 | $ | — | $ | 300,742 |
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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended June 30, 2020 | |||||||||||||||
Refined Products | Crude Oil | Intersegment Eliminations | Total | ||||||||||||
Transportation and terminals revenue | $ | 279,759 | $ | 133,637 | $ | (1,581 | ) | $ | 411,815 | ||||||
Product sales revenue | 34,463 | 8,814 | — | 43,277 | |||||||||||
Affiliate management fee revenue | 1,513 | 3,803 | — | 5,316 | |||||||||||
Total revenue | 315,735 | 146,254 | (1,581 | ) | 460,408 | ||||||||||
Operating expenses | 103,405 | 45,917 | (3,215 | ) | 146,107 | ||||||||||
Cost of product sales | 45,616 | 4,893 | — | 50,509 | |||||||||||
Other operating (income) expense | (138 | ) | (3,775 | ) | — | (3,913 | ) | ||||||||
Earnings of non-controlled entities | (4,592 | ) | (29,097 | ) | — | (33,689 | ) | ||||||||
Operating margin | 171,444 | 128,316 | 1,634 | 301,394 | |||||||||||
Depreciation, amortization and impairment expense | 41,029 | 15,877 | 1,634 | 58,540 | |||||||||||
G&A expense | 30,661 | 11,507 | — | 42,168 | |||||||||||
Operating profit | $ | 99,754 | $ | 100,932 | $ | — | $ | 200,686 |
Six Months Ended June 30, 2019 | |||||||||||||||
Refined Products | Crude Oil | Intersegment Eliminations | Total | ||||||||||||
Transportation and terminals revenue | $ | 657,201 | $ | 312,275 | $ | (2,279 | ) | $ | 967,197 | ||||||
Product sales revenue | 341,977 | 11,007 | — | 352,984 | |||||||||||
Affiliate management fee revenue | 3,321 | 7,132 | — | 10,453 | |||||||||||
Total revenue | 1,002,499 | 330,414 | (2,279 | ) | 1,330,634 | ||||||||||
Operating expenses | 235,542 | 84,470 | (5,058 | ) | 314,954 | ||||||||||
Cost of product sales | 310,596 | 11,374 | — | 321,970 | |||||||||||
Other operating (income) expense | (6,399 | ) | 4,482 | — | (1,917 | ) | |||||||||
(Earnings) losses of non-controlled entities | 3,997 | (76,037 | ) | — | (72,040 | ) | |||||||||
Operating margin | 458,763 | 306,125 | 2,779 | 767,667 | |||||||||||
Depreciation, amortization and impairment expense | 89,064 | 32,558 | 2,779 | 124,401 | |||||||||||
G&A expense | 70,373 | 28,005 | — | 98,378 | |||||||||||
Operating profit | $ | 299,326 | $ | 245,562 | $ | — | $ | 544,888 | |||||||
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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Six Months Ended June 30, 2020 | |||||||||||||||
Refined Products | Crude Oil | Intersegment Eliminations | Total | ||||||||||||
Transportation and terminals revenue | $ | 594,078 | $ | 279,295 | $ | (3,163 | ) | $ | 870,210 | ||||||
Product sales revenue | 347,449 | 14,948 | — | 362,397 | |||||||||||
Affiliate management fee revenue | 3,097 | 7,510 | — | 10,607 | |||||||||||
Total revenue | 944,624 | 301,753 | (3,163 | ) | 1,243,214 | ||||||||||
Operating expenses | 209,287 | 92,689 | (6,361 | ) | 295,615 | ||||||||||
Cost of product sales | 278,958 | 20,787 | — | 299,745 | |||||||||||
Other operating (income) expense | (2,030 | ) | (1,372 | ) | — | (3,402 | ) | ||||||||
Earnings of non-controlled entities | (18,812 | ) | (58,537 | ) | — | (77,349 | ) | ||||||||
Operating margin | 477,221 | 248,186 | 3,198 | 728,605 | |||||||||||
Depreciation, amortization and impairment expense | 87,088 | 31,788 | 3,198 | 122,074 | |||||||||||
G&A expense | 57,315 | 21,761 | — | 79,076 | |||||||||||
Operating profit | $ | 332,818 | $ | 194,637 | $ | — | $ | 527,455 | |||||||
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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. | 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, 2019 | ||||||||||||||||
Refined Products | Crude Oil | Intersegment Eliminations | Total | |||||||||||||
Transportation | $ | 201,175 | $ | 91,532 | $ | — | $ | 292,707 | ||||||||
Terminalling | 49,243 | 4,724 | — | 53,967 | ||||||||||||
Storage | 55,717 | 39,211 | (1,341 | ) | 93,587 | |||||||||||
Ancillary services | 34,401 | 6,919 | — | 41,320 | ||||||||||||
Lease revenue | 7,094 | 17,730 | — | 24,824 | ||||||||||||
Transportation and terminals revenue | 347,630 | 160,116 | (1,341 | ) | 506,405 | |||||||||||
Product sales revenue | 184,695 | 5,294 | — | 189,989 | ||||||||||||
Affiliate management fee revenue | 1,659 | 3,646 | — | 5,305 | ||||||||||||
Total revenue | 533,984 | 169,056 | (1,341 | ) | 701,699 | |||||||||||
Revenue not under the guidance of ASC 606, Revenue from Contracts with Customers: | ||||||||||||||||
Lease revenue(1) | (7,094 | ) | (17,730 | ) | — | (24,824 | ) | |||||||||
(Gains) losses from futures contracts included in product sales revenue(2) | 4,713 | (95 | ) | — | 4,618 | |||||||||||
Affiliate management fee revenue | (1,659 | ) | (3,646 | ) | — | (5,305 | ) | |||||||||
Total revenue from contracts with customers under ASC 606 | $ | 529,944 | $ | 147,585 | $ | (1,341 | ) | $ | 676,188 |
(1) Lease revenue is accounted for under Accounting Standards Codification (“ASC”) 842, Leases.
(2) The impact on product sales revenue from futures contracts falls under the guidance of ASC 815, Derivatives and Hedging.
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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended June 30, 2020 | ||||||||||||||||
Refined Products | Crude Oil | Intersegment Eliminations | Total | |||||||||||||
Transportation | $ | 160,282 | $ | 57,550 | $ | — | $ | 217,832 | ||||||||
Terminalling | 36,303 | 480 | — | 36,783 | ||||||||||||
Storage | 50,726 | 44,709 | (1,581 | ) | 93,854 | |||||||||||
Ancillary services | 28,678 | 12,105 | — | 40,783 | ||||||||||||
Lease revenue | 3,770 | 18,793 | — | 22,563 | ||||||||||||
Transportation and terminals revenue | 279,759 | 133,637 | (1,581 | ) | 411,815 | |||||||||||
Product sales revenue | 34,463 | 8,814 | — | 43,277 | ||||||||||||
Affiliate management fee revenue | 1,513 | 3,803 | — | 5,316 | ||||||||||||
Total revenue | 315,735 | 146,254 | (1,581 | ) | 460,408 | |||||||||||
Revenue not under the guidance of ASC 606, Revenue from Contracts with Customers: | ||||||||||||||||
Lease revenue(1) | (3,770 | ) | (18,793 | ) | — | (22,563 | ) | |||||||||
(Gains) losses from futures contracts included in product sales revenue(2) | 24,434 | 2,321 | — | 26,755 | ||||||||||||
Affiliate management fee revenue | (1,513 | ) | (3,803 | ) | — | (5,316 | ) | |||||||||
Total revenue from contracts with customers under ASC 606 | $ | 334,886 | $ | 125,979 | $ | (1,581 | ) | $ | 459,284 |
(1) Lease revenue 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.
Six Months Ended June 30, 2019 | ||||||||||||||||
Refined Products | Crude Oil | Intersegment Eliminations | Total | |||||||||||||
Transportation | $ | 372,202 | $ | 176,690 | $ | — | $ | 548,892 | ||||||||
Terminalling | 90,540 | 9,970 | — | 100,510 | ||||||||||||
Storage | 113,093 | 77,810 | (2,279 | ) | 188,624 | |||||||||||
Ancillary services | 66,912 | 13,210 | — | 80,122 | ||||||||||||
Lease revenue | 14,454 | 34,595 | — | 49,049 | ||||||||||||
Transportation and terminals revenue | 657,201 | 312,275 | (2,279 | ) | 967,197 | |||||||||||
Product sales revenue | 341,977 | 11,007 | — | 352,984 | ||||||||||||
Affiliate management fee revenue | 3,321 | 7,132 | — | 10,453 | ||||||||||||
Total revenue | 1,002,499 | 330,414 | (2,279 | ) | 1,330,634 | |||||||||||
Revenue not under the guidance of ASC 606, Revenue from Contracts with Customers: | ||||||||||||||||
Lease revenue(1) | (14,454 | ) | (34,595 | ) | — | (49,049 | ) | |||||||||
(Gains) losses from futures contracts included in product sales revenue(2) | 56,822 | 2,307 | — | 59,129 | ||||||||||||
Affiliate management fee revenue | (3,321 | ) | (7,132 | ) | — | (10,453 | ) | |||||||||
Total revenue from contracts with customers under ASC 606 | $ | 1,041,546 | $ | 290,994 | $ | (2,279 | ) | $ | 1,330,261 | |||||||
(1) Lease revenue is accounted for under ASC 842, Leases.
(2) The impact on product sales revenue from futures contracts falls under the guidance of ASC 815, Derivatives and Hedging.
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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Six Months Ended June 30, 2020 | ||||||||||||||||
Refined Products | Crude Oil | Intersegment Eliminations | Total | |||||||||||||
Transportation | $ | 336,287 | $ | 134,665 | $ | — | $ | 470,952 | ||||||||
Terminalling | 76,689 | 3,019 | — | 79,708 | ||||||||||||
Storage | 108,252 | 83,560 | (3,163 | ) | 188,649 | |||||||||||
Ancillary services | 60,918 | 19,950 | — | 80,868 | ||||||||||||
Lease revenue | 11,932 | 38,101 | — | 50,033 | ||||||||||||
Transportation and terminals revenue | 594,078 | 279,295 | (3,163 | ) | 870,210 | |||||||||||
Product sales revenue | 347,449 | 14,948 | — | 362,397 | ||||||||||||
Affiliate management fee revenue | 3,097 | 7,510 | — | 10,607 | ||||||||||||
Total revenue | 944,624 | 301,753 | (3,163 | ) | 1,243,214 | |||||||||||
Revenue not under the guidance of ASC 606, Revenue from Contracts with Customers: | ||||||||||||||||
Lease revenue(1) | (11,932 | ) | (38,101 | ) | — | (50,033 | ) | |||||||||
(Gains) losses from futures contracts included in product sales revenue(2) | (96,613 | ) | (401 | ) | — | (97,014 | ) | |||||||||
Affiliate management fee revenue | (3,097 | ) | (7,510 | ) | — | (10,607 | ) | |||||||||
Total revenue from contracts with customers under ASC 606 | $ | 832,982 | $ | 255,741 | $ | (3,163 | ) | $ | 1,085,560 | |||||||
(1) Lease revenue 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, 2019 | June 30, 2020 | |||||||
Accounts receivable from contracts with customers | $ | 124,701 | $ | 92,745 | ||||
Contract assets | $ | 8,071 | $ | 15,166 | ||||
Contract liabilities | $ | 111,670 | $ | 112,064 |
For the three and six months ended June 30, 2020, respectively, we recognized $10.5 million and $80.0 million of transportation and terminals revenue that was recorded in deferred revenue as of December 31, 2019.
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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, 2020 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 | Total | ||||||||||
Balances at June 30, 2020 | $ | 2,136,926 | $ | 1,292,941 | $ | 3,429,867 | ||||||
Remaining terms | 1 - 18 years | 1 - 12 years | ||||||||||
Estimated revenues from UPOs to be recognized in the next 12 months | $ | 375,549 | $ | 279,881 | $ | 655,430 |
4. | Investments in Non-Controlled Entities |
Our investments in non-controlled entities at June 30, 2020 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”) | 30% | |
Seabrook Logistics, LLC (“Seabrook”) | 50% | |
Texas Frontera, LLC (“Texas Frontera”) | 50% |
In the first quarter of 2020, we sold a 10% interest in Saddlehorn to an affiliate of Black Diamond Gathering LLC, which is majority-owned by Noble Midstream Partners LP, reducing our ongoing investment in Saddlehorn to a 30% interest. We received $79.9 million in cash from the sale, and we recorded a gain of $12.9 million on our consolidated statements of income for the six month period ended June 30, 2020.
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 $1.1 million and $1.0 million during the three months ended June 30, 2019 and 2020, respectively, and $2.6 million and $2.2 million during the six months ended June 30, 2019 and 2020, respectively.
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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We recorded the following revenue and expense transactions from certain of these non-controlled entities in our consolidated statements of income (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2020 | 2019 | 2020 | |||||||||||||
Transportation and terminals revenue: | ||||||||||||||||
BridgeTex, pipeline capacity and storage | $ | 10,181 | $ | 12,677 | $ | 20,326 | $ | 23,425 | ||||||||
Double Eagle, throughput revenue | $ | 1,572 | $ | 1,421 | $ | 3,231 | $ | 3,021 | ||||||||
Saddlehorn, storage revenue | $ | 551 | $ | 565 | $ | 1,103 | $ | 1,131 | ||||||||
Operating expenses: | ||||||||||||||||
Seabrook, storage lease and ancillary services | $ | 6,241 | $ | 7,479 | $ | 13,150 | $ | 14,378 | ||||||||
Other operating income: | ||||||||||||||||
Seabrook, gain on sale of air emission credits | $ | — | $ | — | $ | — | $ | 1,410 |
Our consolidated balance sheets reflected the following balances related to our investments in non-controlled entities (in thousands):
December 31, 2019 | ||||||||||||||||
Trade Accounts Receivable | Other Accounts Receivable | Other Accounts Payable | Long-Term Receivables | |||||||||||||
BridgeTex | $ | 392 | $ | 26 | $ | — | $ | — | ||||||||
Double Eagle | $ | 445 | $ | — | $ | — | $ | — | ||||||||
HoustonLink | $ | 60 | $ | — | $ | — | $ | — | ||||||||
MVP | $ | — | $ | 418 | $ | — | $ | — | ||||||||
Powder Springs | $ | 161 | $ | — | $ | — | $ | 6,006 | ||||||||
Saddlehorn | $ | — | $ | 126 | $ | — | $ | — | ||||||||
Seabrook | $ | 941 | $ | — | $ | 1,349 | $ | — |
June 30, 2020 | ||||||||||||||||
Trade Accounts Receivable | Other Accounts Receivable | Other Accounts Payable | Long-Term Receivables | |||||||||||||
BridgeTex | $ | 273 | $ | 2,054 | $ | — | $ | — | ||||||||
Double Eagle | $ | 480 | $ | — | $ | — | $ | — | ||||||||
MVP | $ | — | $ | 422 | $ | — | $ | — | ||||||||
Powder Springs | $ | 47 | $ | — | $ | — | $ | 8,219 | ||||||||
Saddlehorn | $ | — | $ | 236 | $ | — | $ | — | ||||||||
Seabrook | $ | 768 | $ | — | $ | 3,976 | $ | — |
We are a party to 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 (see Note 7 – Leases for more details regarding this lease).
19
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The financial results from MVP, Powder Springs and Texas Frontera are included in our refined products segment and the financial results from BridgeTex, Double Eagle, HoustonLink, Saddlehorn and Seabrook are included in our crude oil segment, each as earnings of non-controlled entities.
A summary of our investments in non-controlled entities follows (in thousands):
Investments at 12/31/2019 | $ | 1,240,551 | ||
Additional investment | 59,458 | |||
Sale of ownership interest in Saddlehorn | (66,989 | ) | ||
Earnings of non-controlled entities: | ||||
Proportionate share of earnings | 78,265 | |||
Amortization of excess investment and capitalized interest | (916 | ) | ||
Earnings of non-controlled entities | 77,349 | |||
Less: | ||||
Distributions from operations of non-controlled entities | 102,699 | |||
Investments at 6/30/2020 | $ | 1,207,670 | ||
5. | Inventory |
Inventory at December 31, 2019 and June 30, 2020 was as follows (in thousands):
December 31, 2019 | June 30, 2020 | ||||||
Refined products | $ | 96,128 | $ | 63,374 | |||
Liquefied petroleum gases | 29,982 | 19,652 | |||||
Transmix | 39,546 | 15,991 | |||||
Crude oil | 12,714 | 12,697 | |||||
Additives | 6,029 | 4,670 | |||||
Total inventory | $ | 184,399 | $ | 116,384 |
During the six months ended 2020, we recorded lower of average cost or net realizable value adjustments of $78.4 million related to our refined products, liquefied petroleum gases, transmix and crude oil inventories.
20
MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. | Debt |
Long-term debt at December 31, 2019 and June 30, 2020 was as follows (in thousands):
December 31, 2019 | June 30, 2020 | |||||||
Commercial paper | $ | — | $ | 141,000 | ||||
4.25% Notes due 2021 | 550,000 | — | ||||||
3.20% Notes due 2025 | 250,000 | 250,000 | ||||||
5.00% Notes due 2026 | 650,000 | 650,000 | ||||||
3.25% Notes due 2030 | — | 500,000 | ||||||
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 | 500,000 | ||||||
3.95% Notes due 2050 | 500,000 | 500,000 | ||||||
Face value of long-term debt | 4,750,000 | 4,841,000 | ||||||
Unamortized debt issuance costs(1) | (35,263 | ) | (37,986 | ) | ||||
Net unamortized debt discount(1) | (8,662 | ) | (10,365 | ) | ||||
Long-term debt, net | $ | 4,706,075 | $ | 4,792,649 | ||||
(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.
2020 Debt Issuances
In May 2020, we issued $500.0 million of 3.25% senior notes due 2030 in an underwritten public offering. The notes were issued at 99.88% of par. Net proceeds from this offering were approximately $495.2 million after underwriting discounts and offering expenses. The net proceeds from this offering, along with commercial paper borrowings and cash on hand, were used to redeem our $550 million senior notes due in 2021. We recognized $12.9 million of debt prepayment costs as interest expense in our consolidated statements of income related to this early redemption, partially offset by the recognition of a $0.7 million unamortized debt premium, for the three and six month periods ended June 30, 2020.
Other Debt
Revolving Credit Facility. At June 30, 2020, 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, 2020. Borrowings under this facility may be used for general partnership purposes, including capital expenditures. As of December 31, 2019 and June 30, 2020, there were no borrowings outstanding under this facility and $3.5 million obligated for letters of credit. Amounts obligated for letters of credit are not reflected as debt on our consolidated balance sheets, but decrease our borrowing capacity under this facility.
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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Commercial Paper Program. We have a commercial paper program under which we may issue commercial paper notes in an amount up to the available capacity under our $1.0 billion revolving credit facility. The maturities of the commercial paper notes vary, but may not exceed 397 days from the date of issuance. Because the commercial paper we can issue is limited to amounts available under our revolving credit facility, amounts outstanding under the program are classified as long-term debt. The commercial paper notes are sold under customary terms in the commercial paper market and are issued at a discount from par, or alternatively, are sold at par and bear varying interest rates on a fixed or floating basis. Commercial paper borrowings outstanding at June 30, 2020 were $141.0 million. The weighted-average interest rate for commercial paper borrowings based on the number of days outstanding was 1.2% for the six months ended June 30, 2020.
7. | Leases |
Operating Leases – Lessee
Related Party Operating Lease. We have 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.
The following tables provide information about our third party and our Seabrook operating leases (dollars in thousands):
Three Months Ended June 30, 2019 | Three Months Ended June 30, 2020 | |||||||||||||||||||||||
Third Party Leases | Seabrook Lease | All Leases | Third Party Leases | Seabrook Lease | All Leases | |||||||||||||||||||
Total lease expense | $ | 5,776 | $ | 6,241 | $ | 12,017 | $ | 5,709 | $ | 7,479 | $ | 13,188 | ||||||||||||
Six Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | |||||||||||||||||||||||
Third Party Leases | Seabrook Lease | All Leases | Third Party Leases | Seabrook Lease | All Leases | |||||||||||||||||||
Total lease expense | $ | 11,425 | $ | 13,150 | $ | 24,575 | $ | 11,699 | $ | 14,378 | $ | 26,077 | ||||||||||||
December 31, 2019 | June 30, 2020 | |||||||||||||||||||||||
Third Party Leases | Seabrook Lease | All Leases | Third Party Leases | Seabrook Lease | All Leases | |||||||||||||||||||
Current lease liability | $ | 15,136 | $ | 11,085 | $ | 26,221 | $ | 15,337 | $ | 11,914 | $ | 27,251 | ||||||||||||
Long-term lease liability | $ | 81,508 | $ | 62,515 | $ | 144,023 | $ | 77,354 | $ | 56,920 | $ | 134,274 | ||||||||||||
Right-of-use asset | $ | 98,268 | $ | 73,600 | $ | 171,868 | $ | 90,021 | $ | 68,834 | $ | 158,855 | ||||||||||||
8. | 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 $2.4 million for each of the three months ended June 30, 2019 and 2020, respectively, and $6.5 million and $6.9 million for the six months ended June 30, 2019 and 2020, respectively.
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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In addition, we sponsor two pension plans, including one for all non-union employees and one that covers certain union employees, and a postretirement benefit plan for certain employees. Prior to the March 2020 sale of our New Haven terminal (See Note 1 – Organization, Description of Business and Basis of Presentation), we sponsored an additional union pension plan that covered union employees at that terminal. Net periodic benefit expense for the three and six months ended June 30, 2019 and 2020 was as follows (in thousands):
Three Months Ended | Three Months Ended | ||||||||||||||
June 30, 2019 | June 30, 2020 | ||||||||||||||
Pension Benefits | Other Postretirement Benefits | Pension Benefits | Other Postretirement Benefits | ||||||||||||
Components of net periodic benefit costs: | |||||||||||||||
Service cost | $ | 6,358 | $ | 43 | $ | 6,735 | $ | 67 | |||||||
Interest cost | 3,110 | 135 | 2,711 | 127 | |||||||||||
Expected return on plan assets | (2,317 | ) | — | (2,809 | ) | — | |||||||||
Amortization of prior service credit | (45 | ) | — | (45 | ) | — | |||||||||
Amortization of actuarial loss | 1,508 | 117 | 1,322 | 136 | |||||||||||
Settlement cost | 2,060 | — | — | — | |||||||||||
Net periodic benefit cost | $ | 10,674 | $ | 295 | $ | 7,914 | $ | 330 |
Six Months Ended | Six Months Ended | ||||||||||||||
June 30, 2019 | June 30, 2020 | ||||||||||||||
Pension Benefits | Other Postretirement Benefits | Pension Benefits | Other Postretirement Benefits | ||||||||||||
Components of net periodic benefit costs: | |||||||||||||||
Service cost | $ | 12,885 | $ | 97 | $ | 13,938 | $ | 129 | |||||||
Interest cost | 6,110 | 254 | 5,513 | 239 | |||||||||||
Expected return on plan assets | (4,691 | ) | — | (5,695 | ) | — | |||||||||
Amortization of prior service credit | (90 | ) | — | (90 | ) | — | |||||||||
Amortization of actuarial loss | 2,785 | 188 | 2,734 | 255 | |||||||||||
Settlement cost | 2,060 | — | 969 | — | |||||||||||
Settlement gain on disposition of assets | — | — | (1,342 | ) | — | ||||||||||
Net periodic benefit cost | $ | 19,059 | $ | 539 | $ | 16,027 | $ | 623 | |||||||
The service component of our net periodic benefit costs is presented in operating expense and G&A expense, and the non-service components are presented in other (income) expense in our consolidated statements of income.
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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The changes in accumulated other comprehensive loss (“AOCL”) related to employee benefit plan assets and benefit obligations for the three and six months ended June 30, 2019 and 2020 were as follows (in thousands):
Three Months Ended | Three Months Ended | |||||||||||||||
June 30, 2019 | June 30, 2020 | |||||||||||||||
Gains (Losses) Included in AOCL | Pension Benefits | Other Postretirement Benefits | Pension Benefits | Other Postretirement Benefits | ||||||||||||
Beginning balance | $ | (87,370 | ) | $ | (5,338 | ) | $ | (101,447 | ) | $ | (8,259 | ) | ||||
Net actuarial gain (loss) | (10,029 | ) | (884 | ) | 1,560 | (1,146 | ) | |||||||||
Recognition of prior service credit amortization in income | (45 | ) | — | (45 | ) | — | ||||||||||
Recognition of actuarial loss amortization in income | 1,508 | 117 | 1,322 | 136 | ||||||||||||
Recognition of settlement cost in income | 2,060 | — | — | — | ||||||||||||
Ending balance | $ | (93,876 | ) | $ | (6,105 | ) | $ | (98,610 | ) | $ | (9,269 | ) |
Six Months Ended | Six Months Ended | |||||||||||||||
June 30, 2019 | June 30, 2020 | |||||||||||||||
Gains (Losses) Included in AOCL | Pension Benefits | Other Postretirement Benefits | Pension Benefits | Other Postretirement Benefits | ||||||||||||
Beginning balance | $ | (88,602 | ) | $ | (5,409 | ) | $ | (104,739 | ) | $ | (8,378 | ) | ||||
Net actuarial gain (loss) | (10,029 | ) | (884 | ) | 813 | (1,146 | ) | |||||||||
Curtailment gain | — | — | 1,703 | — | ||||||||||||
Recognition of prior service credit amortization in income | (90 | ) | — | (90 | ) | — | ||||||||||
Recognition of actuarial loss amortization in income | 2,785 | 188 | 2,734 | 255 | ||||||||||||
Recognition of settlement cost in income | 2,060 | — | 969 | — | ||||||||||||
Ending balance | $ | (93,876 | ) | $ | (6,105 | ) | $ | (98,610 | ) | $ | (9,269 | ) | ||||
Contributions estimated to be paid into the plans in 2020 are $29.3 million and $0.7 million for the pension plans and other postretirement benefit plan, respectively.
9. | Long-Term Incentive Plan |
The compensation committee of our general partner’s board of directors administers our long-term incentive plan (“LTIP”) covering certain of our employees and the independent directors of our general partner. The LTIP primarily consists of phantom units and permits the grant of awards covering an aggregate payout of 11.9 million of our common units. The estimated units remaining available under the LTIP at June 30, 2020 total 1.0 million.
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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Equity-based incentive compensation expense for the three and six months ended June 30, 2019 and 2020, primarily recorded as G&A expense on our consolidated statements of income, was as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2020 | 2019 | 2020 | |||||||||||||
Performance-based awards | $ | 9,317 | $ | 1,821 | $ | 12,961 | $ | (126 | ) | |||||||
Time-based awards | 1,573 | 2,435 | 2,843 | 4,537 | ||||||||||||
Total | $ | 10,890 | $ | 4,256 | $ | 15,804 | $ | 4,411 | ||||||||
In first and second quarters of 2020, we reduced our LTIP accruals related to performance awards vesting in 2020 and 2021 to reflect the estimated impacts of COVID-19 related reductions in economic activity and the significant decline in commodity prices.
On January 31, 2020, 378,144 unit awards were granted pursuant to our LTIP. These awards included both performance-based and time-based awards and have a three-year vesting period that will end on December 31, 2022.
Basic and Diluted Net Income Per Common Unit
The difference between our actual common units outstanding and our weighted-average number of common units outstanding used to calculate basic net income per unit is due to the impact of: (i) the unit awards issued to non-employee directors and (ii) the weighted average effect of units actually issued or repurchased during a period. The difference between the weighted-average number of common units outstanding used for basic and diluted net income per unit calculations on our consolidated statements of income is primarily due to the dilutive effect of unit awards associated with our LTIP that have not yet vested.
10. | Derivative Financial Instruments |
Interest Rate Derivatives
In second quarter 2020, upon issuance of $500.0 million of 3.25% notes due 2030, we terminated and settled $100.0 million of treasury lock agreements that we had previously entered into to protect against the variability of future interest payments for a loss of $10.4 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 term of the hedged transaction in accordance with our hedge strategy.
Commodity Derivatives
Our open futures contracts at June 30, 2020 were as follows:
Type of Contract/Accounting Methodology | Product Represented by the Contract and Associated Barrels | Maturity Dates | ||
Futures - Economic Hedges | 2.3 million barrels of refined products and crude oil | Between July 2020 and November 2022 | ||
Futures - Economic Hedges | 0.2 million barrels of gas liquids | Between July and December 2020 |
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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Commodity Derivatives Contracts and Deposits Offsets
At December 31, 2019 and June 30, 2020, we had made margin deposits of $27.4 million and $25.5 million, respectively, for our futures contracts with our counterparties, which were recorded as current assets under 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, 2019 and June 30, 2020 (in thousands):
Description | Gross Amounts of Recognized Liabilities | Gross Amounts of Assets Offset in the Consolidated Balance Sheets | Net Amounts of Liabilities Presented in the Consolidated Balance Sheets | Margin Deposit Amounts Not Offset in the Consolidated Balance Sheets | Net Asset Amount(1) | |||||||||||||||
As of 12/31/2019 | $ | (11,033 | ) | $ | 811 | $ | (10,222 | ) | $ | 27,415 | $ | 17,193 | ||||||||
As of 6/30/2020 | $ | (14,570 | ) | $ | 3,218 | $ | (11,352 | ) | $ | 25,456 | $ | 14,104 | ||||||||
(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 December 31, 2019 and June 30, 2020 was $17.3 million and $12.7 million, respectively.
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, 2019 and 2020 were as follows (in thousands):
Three Months Ended | Six Months Ended | ||||||||||||||
June 30, | June 30, | ||||||||||||||
Derivative Losses Included in AOCL | 2019 | 2020 | 2019 | 2020 | |||||||||||
Beginning balance | $ | (30,229 | ) | $ | (60,065 | ) | $ | (26,480 | ) | $ | (48,960 | ) | |||
Net gain (loss) on cash flow hedges | (6,659 | ) | 1,470 | (11,035 | ) | (10,444 | ) | ||||||||
Reclassification of net loss on cash flow hedges to income | 601 | 847 | 1,228 | 1,656 | |||||||||||
Ending balance | $ | (36,287 | ) | $ | (57,748 | ) | $ | (36,287 | ) | $ | (57,748 | ) |
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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following is a summary of the effect on our consolidated statements of income for the three and six months ended June 30, 2019 and 2020 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, 2019 | $ | (6,659 | ) | Interest expense | $ | (601 | ) | |||
Three Months Ended June 30, 2020 | $ | 1,470 | Interest expense | $ | (847 | ) | ||||
Six Months Ended June 30, 2019 | $ | (11,035 | ) | Interest expense | $ | (1,228 | ) | |||
Six Months Ended June 30, 2020 | $ | (10,444 | ) | Interest expense | $ | (1,656 | ) |
As of June 30, 2020, the net loss estimated to be classified to interest expense over the next twelve months from AOCL is approximately $3.6 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, 2019 and 2020 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 | 2019 | 2020 | 2019 | 2020 | ||||||||||||||
Futures contracts | Product sales revenue | $ | (4,619 | ) | $ | (26,755 | ) | $ | (59,130 | ) | $ | 97,014 | ||||||
Futures contracts | Cost of product sales | (6,148 | ) | (417 | ) | (3,875 | ) | (4,344 | ) | |||||||||
Basis derivative agreement | Other operating income (expense) | (6,487 | ) | 3,400 | (4,959 | ) | 501 | |||||||||||
Total | $ | (17,254 | ) | $ | (23,772 | ) | $ | (67,964 | ) | $ | 93,171 |
The impact of the derivatives in the above table was reflected as cash from operations on our consolidated statements of cash flows.
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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Balance Sheets
The following 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, 2019 and June 30, 2020 (in thousands):
December 31, 2019 | ||||||||||||
Asset Derivatives | Liability Derivatives | |||||||||||
Derivative Instrument | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||||
Futures contracts | Commodity derivatives contracts, net | $ | 811 | Commodity derivatives contracts, net | $ | 11,033 | ||||||
Basis derivative agreement | Other current assets | — | Other current liabilities | 8,457 | ||||||||
Basis derivative agreement | Other noncurrent assets | — | Other noncurrent liabilities | 8,847 | ||||||||
Total | $ | 811 | Total | $ | 28,337 | |||||||
June 30, 2020 | ||||||||||||
Asset Derivatives | Liability Derivatives | |||||||||||
Derivative Instrument | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||||
Futures contracts | Commodity derivatives contracts, net | $ | 1,024 | Commodity derivatives contracts, net | $ | 14,555 | ||||||
Futures contracts | Other noncurrent assets | 2,194 | Other noncurrent liabilities | 15 | ||||||||
Basis derivative agreement | Other current assets | — | Other current liabilities | 8,839 | ||||||||
Basis derivative agreement | Other noncurrent assets | — | Other noncurrent liabilities | 3,910 | ||||||||
Total | $ | 3,218 | Total | $ | 27,319 |
11. | Fair Value |
Fair Value Methods and Assumptions - Financial Assets and Liabilities.
We used the following methods and assumptions in estimating fair value of our financial assets and liabilities:
• | Commodity derivatives contracts. These include exchange-traded futures contracts related to petroleum products. These contracts are carried at fair value on our consolidated balance sheets and are valued based on quoted prices in active markets. See Note 10 – Derivative Financial Instruments for further disclosures regarding these 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 (see Note 10 - Derivative Financial Instruments for further disclosures regarding this agreement). The fair value of this derivative was calculated based on observable market data inputs, including published commodity pricing data and market interest rates. The key inputs in the fair value calculation include the forward price curves for crude oil, the implied forward correlation in crude oil prices between West Texas and the Houston Gulf Coast, and the implied forward volatility for crude oil futures contracts. |
• | Long-term receivables. These primarily include payments receivable under a sales-type leasing arrangement and cost reimbursement payments receivable. These receivables were recorded at fair value on our consolidated balance sheets, using then-current market rates to estimate the present value of future cash flows. |
• | Guarantees and contractual obligations. At June 30, 2020, these primarily include a long-term contractual obligation we entered into in connection with the sale of our three marine terminals to a subsidiary of Buckeye. This obligation requires us to perform certain environmental remediation |
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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
work on Buckeye’s behalf at the New Haven terminal. The contractual obligation was recorded at fair value on our consolidated balance sheets upon initial recognition and was calculated using our best estimate of potential outcome scenarios to determine our liability for the remediation costs required in this agreement.
• | Debt. The fair value of our publicly traded notes was based on the prices of those notes at December 31, 2019 and June 30, 2020; however, where recent observable market trades were not available, prices were determined using adjustments to the last traded value for that debt issuance or by adjustments to the prices of similar debt instruments of peer entities that are actively traded. The carrying amount of borrowings, if any, under our revolving credit facility and our commercial paper program approximates fair value due to the frequent repricing of these obligations. |
Fair Value Measurements - Financial Assets and Liabilities
The following tables summarize the carrying amounts, fair values and fair value measurements recorded or disclosed as of December 31, 2019 and June 30, 2020 based on the three levels established by ASC 820, Fair Value Measurements and Disclosures (in thousands):
December 31, 2019 | ||||||||||||||||||||
Assets (Liabilities) | Fair Value Measurements using: | |||||||||||||||||||
Carrying Amount | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||
Commodity derivatives contracts | $ | (10,222 | ) | $ | (10,222 | ) | $ | (10,222 | ) | $ | — | $ | — | |||||||
Basis derivative agreement | $ | (17,304 | ) | $ | (17,304 | ) | $ | — | $ | (17,304 | ) | |||||||||
Long-term receivables | $ | 20,782 | $ | 20,782 | $ | — | $ | — | $ | 20,782 | ||||||||||
Guarantees and contractual obligations | $ | (408 | ) | $ | (408 | ) | $ | — | $ | — | $ | (408 | ) | |||||||
Debt | $ | (4,706,075 | ) | $ | (5,192,685 | ) | $ | — | $ | (5,192,685 | ) | $ | — |
June 30, 2020 | ||||||||||||||||||||
Assets (Liabilities) | Fair Value Measurements using: | |||||||||||||||||||
Carrying Amount | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||
Commodity derivatives contracts | $ | (11,352 | ) | $ | (11,352 | ) | $ | (11,352 | ) | $ | — | $ | — | |||||||
Basis derivative agreement | $ | (12,749 | ) | $ | (12,749 | ) | $ | — | $ | (12,749 | ) | $ | — | |||||||
Long-term receivables | $ | 21,517 | $ | 21,517 | $ | — | $ | — | $ | 21,517 | ||||||||||
Guarantees and contractual obligations | $ | (11,286 | ) | $ | (11,286 | ) | $ | — | $ | — | $ | (11,286 | ) | |||||||
Debt | $ | (4,792,649 | ) | $ | (4,688,925 | ) | $ | — | $ | (4,688,925 | ) | $ | — |
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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. | Commitments and Contingencies |
Butane Blending Patent Infringement Proceeding
On October 4, 2017, Sunoco Partners Marketing & Terminals L.P. (“Sunoco”) brought an action for patent infringement in the U.S. District Court for the District of Delaware alleging Magellan Midstream Partners, L.P. (“Magellan”) and Powder Springs Logistics, LLC (“Powder Springs”) have infringed patents relating to butane blending at the Powder Springs facility located in Powder Springs, Georgia. Sunoco has since submitted pleadings alleging that Magellan has also infringed various patents relating to butane blending at nine Magellan facilities, in addition to Powder Springs. Sunoco is seeking monetary damages, attorneys’ fees and a permanent injunction enjoining Magellan and Powder Springs from infringing the subject patents. We deny and are vigorously defending against all claims asserted by Sunoco. Although it is not possible to predict the ultimate outcome, we believe the ultimate resolution of this matter will not have a material adverse impact on our results of operations, financial position or cash flows.
Environmental Liabilities
Liabilities recognized for estimated environmental costs were $14.9 million and $12.5 million at December 31, 2019 and June 30, 2020, respectively. We have classified environmental liabilities as current or noncurrent based on management’s estimates regarding the timing of actual payments. Environmental expenses recognized as a result of changes in our environmental liabilities are generally included in operating expenses on our consolidated statements of income. Environmental expenses were $1.4 million and $0.8 million for the three months ended June 30, 2019 and 2020, respectively, and $3.4 million and $1.2 million for the six months ended June 30, 2019 and 2020, respectively.
Environmental Receivables
Receivables from insurance carriers and other third parties related to environmental matters were $2.9 million at December 31, 2019, of which $1.8 million and $1.1 million were recorded to other accounts receivable and long-term receivables, respectively, on our consolidated balance sheets. Receivables from insurance carriers and other third parties related to environmental matters were $1.8 million at June 30, 2020, of which $0.9 million and $0.9 million were recorded to other accounts receivable and long-term receivables, respectively, on our consolidated balance sheets.
Other
In first quarter 2020, we entered into a long-term contractual obligation in connection with the sale of three marine terminals to Buckeye. This obligation requires us to perform certain environmental remediation work on Buckeye’s behalf at the New Haven terminal. As of June 30, 2020, our consolidated balance sheets reflected a current liability of $0.7 million and a noncurrent liability of $10.2 million to reflect the fair value of this obligation.
We have entered into an agreement to guarantee our 50% pro rata share, up to $25.0 million, of obligations under Powder Springs’ credit facility. As of June 30, 2020, our consolidated balance sheets reflected a $0.4 million other current liability and a corresponding increase in our investment in non-controlled entities on our consolidated balance sheets to reflect the fair value of this guarantee.
We and the non-controlled entities in which we own an interest are a party to various other claims, legal actions and complaints. While the results cannot be predicted with certainty, management believes the ultimate resolution of these claims, legal actions and complaints after consideration of amounts accrued, insurance coverage
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MAGELLAN MIDSTREAM PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
or other indemnification arrangements will not have a material adverse effect on our results of operations, financial position or cash flows.
13. | Related Party Transactions |
Stacy Methvin is an independent member of our general partner’s board of directors and is also a director of one of our customers. We received tariff, terminalling and other ancillary revenue from this customer of $7.0 million and $7.3 million for the three months ended June 30, 2019 and 2020, respectively, and $14.3 million and $15.7 million for the six months ended June 30, 2019 and 2020, respectively. We recorded receivables of $3.8 million and $2.3 million from this customer at December 31, 2019 and June 30, 2020, respectively. In the second quarter of 2020, we also received storage and other miscellaneous revenue of $0.2 million from a subsidiary of a separate company for which Stacy Methvin serves as a director.
See Note 4 – Investments in Non-Controlled Entities and Note 7 – Leases for details of transactions with our joint ventures.
14. | Partners’ Capital and Distributions |
Partners’ Capital
Our general partner’s board of directors authorized the repurchase of up to $750 million of our common units through 2022. The timing, price and actual number of common units repurchased will depend on a number of factors including our expected expansion capital spending needs, alternative investment opportunities, excess cash available, legal and regulatory requirements, market conditions and the trading price of our common units. The repurchase program does n